Equity Indexed Annuities Promise High Returns...Paralleled With High Risk
And High Fees
Equity-indexed annuities are extremely popular right now. And, with purported
returns of up to 8 percent and a zero chance of loss on the principal,
it’s easy to see
why EIAs have appeal. Due to catastrophic losses in the stock market over the last few years,
many investors are opting for “safer” bets, and annuities
seem to fit the bill. Unfortunately, for some investors, the products
don’t merit the hype.
Take 82 year-old Helen Siswein, for example. In January, she highlighted
her experience with equity-indexed annuities forInvestmentNews. According to the Jan. 30 article, in 2003, Siswein put $1 million into
equity-indexed annuities on the advice of an insurance agent who came to her home.
While the agent made sure to tell her about the potential 8 percent return
with no chance of a loss, she wasn’t told that her money had to
stay in the annuities for a long period of time – 12 years in one
case – unless she didn’t mind paying high surrender fees of
10 to 15 percent. Siswein was 75 in 2003. When she went to withdraw her
funds in 2008, at age 80, the high fees to cancel her contract resulted
in an annual return of about 3 percent. (In contrast, the index the annuity
tracked had returns of 6.3 percent.)
In the article,
InvestmentNews quoted Kent Smetters, a professor of insurance at The Wharton School of
the University of Pennsylvania and a former economic policy official at
the Treasury Department.
Smetters explained that equity-indexed annuities are extremely complex
and usually include “really high hidden fees.”
“That's why they're terrible ideas for older people, even
though they're peddled to them,” Smetters said.
As reported in the article, insurers sold $8.7 billion of indexed annuities
in a single quarter in 2010.
EIA commissions for sales reps can be as much as 12 percent, which usually
isn’t disclosed to investors. With such high incentives, it’s clear why representatives like to
push the products, even to seniors for whom the products really aren’t suitable.
The indexed annuities contracts are “one of the most abusively sold
products on the market today,” Barbara Roper, director of investor
protection for the Consumer Federation of America, told