The Downside of Equity-Indexed Annuities defines an EIA as “an alternative savings plan for conservative investors.” Investors have the option of choosing an immediate or deferred annuity and the returns are tied to the index of one of the stock markets, such as the Dow Jones Industrial Average. The performance of the annuity is also dependent on the contract terms.

Even though equity-indexed annuities are attracting more investors recently, they are not new. In fact, EIAs have been around since the 1990s. From 2003 to 2004, sales of these annuities doubled. By 2007, sales were close to $25 billion; in June 2008, over $123 billion had been invested in EIAs.

The Securities Exchange Commission (SEC) took action in 2008 to stop the abusive sales practices that were being used to promote the annuities to seniors. It was discovered that EIAs were among the securities involved in senior investment fraud. The SEC started to work on a rule that would classify EIAs as securities. These investments do have the potential to produce a greater return, but there are many problems associated with them.

If you are considering investing in an indexed annuity, you need to know the following:

  • The fees are high.
    You will be charged a 10 percent tax penalty, if you surrender the annuity early. Surrender charges are also high, sometimes up to 15 to 20 percent of the amount that was invested, but those aren’t the only hefty charges. EIA commission fees can be up to 13 percent

  • The annuities are so complex that the agents selling them don’t understand them.
    If your agent doesn’t completely comprehend the features associated with the annuity, how do you know what you are really buying?

  • EIAs are not currently regulated.
    Unlike securities that are governed by various laws, including the Securities Act of 1933 and Securities Exchange Act of 1934, equity-indexed annuities are not regulated.