An equity-indexed annuity is a contract between an investor and an insurance
company in which the investor agrees to make payments to the insurance
company throughout a set accumulation period and the insurance company
agrees to make periodic payments to the investor once the accumulation
period ends. During the accumulation period, the insurance company takes
the payments made by the investor and credits the investor with a return
that is based on an equity index (i.e. the S&P 500). Typically, a
guaranteed minimum return is promised to the investor.
While the annuities sound like an ideal investment vehicle, there are
numerous problems associated with them, including: lack of disclosures,
high potential for abusive sales tactics, and hidden costs and fees.
On its website, FINRA warns investors about the annuities, saying: "EIAs
are anything but easy to understand." It further cautions: "Some
EIAs allow the insurance company to change participation rates, cap rates,
or spread/asset/margin fees either annually or at the start of the next
contract term. If an insurance company subsequently lowers the participation
rate or cap rate or increases the spread/asset/margin fees, this could
adversely affect your return."
According to a July 6 CBS Moneywatch.com article by Jane Bryant Quinn,
the SEC was concerned enough about the potential investor risks associated
with equity-indexed annuities that it had planned to regulate them after
an industry review was conducted. However, according to Quinn, the insurance
industry lobbied to prevent the regulation, and instead of leaving the
annuities within the SEC's jurisdiction, the financial reform bill
left the industry's oversight in the hands of the states, thanks to
a change inserted by Iowa Democrat Sen. Tom Harkin.