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 four different 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 InvestmentNews.