Equity-Indexed Annuities Aren't Worth the Hype
EIA Sales Are On The Rise
Equity-indexed annuities (contracts between an investor and an insurance
company that bases the investor's return on an equity index, like
the S&P 500) are typically sold as simple, easy-to-understand investment
products that carry virtually no risk.
In reality, EIAs are some of the most complex and difficult to understand investment vehicles on the market. According to Mel Lindauer at Forbes.com, this complexity arises primarily because the methods used to calculate the returns on an EIA are incredibly complicated and generally vary between policies. This makes it difficult to know how much of a return an investor can reasonably expect and makes it almost impossible to compare one EIA to another.
Unfortunately for investors, EIAs are on the rise. This is due, in part, to the recent decline in investor confidence in the stock market, which means investors are now more susceptible than ever to sales tactics pushing investment products with "zero risk."
The rise in sales coupled with the problems associated with EIAs has led to increased scrutiny by regulatory agencies. FINRA recently issued an investor alert warning about the dangers of investing in equity-indexed annuities. The SEC is currently working to define EIAs as securities, which (according to Lindauer) would increase investor protections against unsuitable recommendations by sales agents. It is not yet known when (and if) the new classification would take place.