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I don’t like equity-indexed annuities.
I believe they are dangerous to seniors and that they should be
avoided at all costs. I’ve been shouting this message from the
mountaintops the last two years. And people are listening—everyone,
it seems, except the agents selling them!
I want to thank the journalists from The Wall Street Journal, USA
Today, and many local and regional newspapers that have written
about the dangers of equity-indexed annuities. Investors have been
warned by Suze Orman. The securities industry has been admonished by
the National Association of Securities Dealers (NASD). Class action
lawsuits are under way that attempt to protect seniors and get their
money back.
Equity-indexed annuities are mainly sold by insurance agents with
little investment-related training. Many of them aren’t licensed to
sell a stock, bond, mutual fund or even a Certificate of Deposit.
Yet they are ‘qualified’ to ascertain that an equity-index annuity
is better then any other investment. They are right—it is better for
them, but it’s sure not better for you.
These agents are beginning to feel the pressure. The lead article in
the March 2006 edition of The Agent’s Sales Journal is titled “Index
Annuities and Media Negativity”, written by one of the insurance
industry’s strongest advocates of equity-indexed annuities. The
negative publicity, he says, is the result of “two lawsuits alleging
bad agent behavior.” He goes on to say “…this attention is not
questioning the merits of fixed annuities (equity-indexed
annuities), but about lost revenues to the securities industry.” He
concludes “the negative annuity talk will lessen later this year as
reporters find something new to talk about.”
Not if I have anything to do about it! Let me respond to some of the
comments in this article.
First, the author fails to mention that the two lawsuits are
class-action lawsuits, not suits by a few individuals. I believe
additional class-action lawsuits will turn thousands of attorneys
into millionaires much like asbestos-related lawsuits have.
Second, I am extremely critical of their high commissions and the
surrender periods that can last longer than most marriages. But I am
also critical of them based on their ‘merits’. Equity-indexed
annuities’ supposed benefits can be better attained, without
investors being forced to lock up their money.
For instance, most people buy an equity-indexed annuity because they
believe it will allow them to get the return of the stock market
while guaranteeing them a return of at least 3%. Since the investor
must leave their money in the contract usually for 10 years or more
to get those benefits, we’ll use a 10-year time frame for comparing
the alternatives.
Let’s suppose an investor placed 60% of their money into a 10-year
Government guaranteed bond and the other 40% into an S&P 500 index
fund and held both for 10 years. I’ve looked at the results of this
for every 10-year period since 1950—529 rolling periods.
Here are some interesting facts. You would not have earned less than
3% per year in ANY of them! So you get the downside protection you
desire. Unlike equity-indexed annuities, though, you aren’t limited
by what you can earn on the upside.
The returns were greater than 6%, 80% of the time. You would have
earned an average of 10% per year or more 45% of the time. Best of
all you had access to your money throughout that period without
automatic surrender penalties.
The upside potential is even greater if 100% is placed in an S&P 500
index fund and all the dividends are reinvested. Again, there wasn’t
a single 10-year period since 1950 that the return was negative. And
you would have earned over 10% per year 66% of the time.
Third, a white-paper was done by a former SEC economist and PhD
specifically on the merits of EIAs. Here’s the bottom line: “We
estimate that between 15% and 20% of the premium paid by investors
in equity-indexed annuities is a transfer of wealth from
unsophisticated investors to insurance companies and their sales
forces.”
So don’t be fooled by the smooth talking agent trying to sell you an
equity-indexed annuity. Find out the facts, look at the alternatives
and you will quickly see it’s not in YOUR best interest.
Have a financial question? Send me an email and I’ll personally
respond, free of charge. Go to www.guardingyourwealth.com and click
on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwid. |
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