Why Equity-Indexed Annuities Aren’t a Good Investment
June 12th, 2011 | Author: weissheiss
Have you heard about equity-indexed annuities? If so, you might have been tempted to invest in them. After all, they promise returns on your investment if the stock market surges, and no losses in the event of a crash. The truth of the matter is that the only people who get rich from equity-indexed annuities are the folks who convince you to invest in them.
Boiled down to their simplest form, equity-indexed annuities are basically fixed income funds minus commissions, profits, and taxes. So where’s the deal in that? What happened to the promises of grand returns on your investment, “100% of the average increase of the S&P 500 index”? They’re all just a scheme to reel you in.
Equity-indexed annuities are offered by insurance companies. As you might imagine, that fact brings with it a nightmare of tricky wording, hidden fees, and fuzzy math. Let’s use the quoted example from above. This is a realistic example of the wording in equity-indexed annuity sales pitches. But it’s horribly misleading.
For one thing, the S&P’s returns depend on dividends and stock price gains. But what the salesman won’t tell you is that you’ll only receive returns based on the stock price gain. If the S&P rises by 8%, but only 5% of that came from stock price gains, your returns will be tied to that 5%.
For another thing, the average increase of the S&P is different from the total increase. These annuities base their returns on monthly averages. At the end of the year, they tally up the S&P’s average gains per month, then divide by 12. Remember how we used 5% as a figure for stock price gains? The average increase is statistically inclined to be half of that – 2.5%.
But the gouging doesn’t stop there, because the insurance companies deduct fees from the average. After all is said and done, the returns on an equity-indexed annuity can be very modest, if not downright laughable. If you plan to pull your money out after a few years, expect to be hit with hefty penalties. And we won’t even go into the fees, terms and conditions associated with these products.
And don’t be taken in by up-front signing bonuses when you make a deposit. The reason those bonuses are available is because the annuities yield such poor returns.
Posted in Indexed Annuities | 
Tags: Commissions, Crash, Equity Indexed Annuities, Investment Stock, Losses, Market Surges, Profits, Truth Of The Matter