Annuities---The Whole Truth

This is a continutation of commenting on the article from 4/25/05. All credits to the article are given there. The actual article is in black and my comments are in red.

What is an Annuity?

An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. If the payments are delayed to the future, you have a deferred annuity. If the payments start immediately, you have an immediate annuity. You buy the annuity either with a single payment or a series of payments called premiums.

Annuities come in two types: fixed and variable. With a fixed annuity, the insurance company guarantees both the rate of return and the payout. As its name implies, a variable annuity's rate of return is not stable, but varies with the stock, bond, and money market funds that you choose as investment options. There is no guarantee that you will earn any return on your investment and there is a risk that you will lose money. Unlike fixed contracts, variable annuities are securities registered with the Securities and Exchange Commission (SEC). To learn more about variable annuities, read our Investor Alert, Should You Exchange Your Variable Annuity?

What is an Equity-Indexed Annuity?

EIAs have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity
[This is NOT TRUE---An Equity Indexed Annuity is a FIXED annuity and You can NOT LOSE MONEY IN IT as long as you hold it until maturity. In fact, like every other fixed annuity, an equity indexed annuity has a minimum guarantee and you are guaranteed to make some money if you hold it until the maturity date EVEN IF THE MARKET DECLINES CONTINUOUSLY]. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity. [Again, this is false. Since an Equity Index Annuity is Fixed, It has the SAME risk as any other fixed annuity and you can't lose money like you can in a variable annuity. Unlike traditional fixed annuities, however, there is potential to make more money without taking any market risk by using the indexing options.]

EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.

Caution! Unlike variable annuities, EIAs are typically structured so that they are not securities registered with the SEC. Nor are the sales of EIAs regulated by the SEC and NASD. This means that non-registered EIAs are not subject to the customer suitability, disclosure, and sales practice requirements that registered securities are. [VERY GREAT POINT. There are much less regulation on these vehicles. This is a cause for concern. Let me point out that the real risk is there is much less regulation on the agents who sell them. Agents do not have to be securities licensed to sell these. So therefore, a regular old life insurance agent can sell these products. This can be a problem. However, these are still annuities, which means that they are insurance products. Therefore, they fall under regulations of the insurance industry. The insurance industry is a highly regulated industry and that is at least some consolation.]

Ignorance is NOT Bliss.

For more information please visit:
http://www.AnnuityMD.org/equity-indexed-annuities.htm

Okay, let us take a look at the article I posted on 4/25 on equity indexed annuities. I thought it was particularly good and what I would like to do is to take pieces of it and add some insight to it. Full credit is given to the source on the post and the link to the actual article is there also.

So here we go. The actual article is in black and my comments will be in red:

Why a Brochure on Equity-Indexed Annuities?

Sales of equity-indexed annuities (EIAs) have grown considerably in recent years. [Word has it that these vehicles may account for over 50% of all annuity sales in 2005] Although one insurance company includes the word "simple" in the name of their product, EIAs are anything but easy to understand. One of the most confusing features of an EIA is the method used to calculate the gain in the index to which the annuity is linked. To make matters worse, there is not one, but several different indexing methods. Because of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one EIA to another. [Yes, leave it up to insurance companies to keep things simple---yeah right. Most insurance products are complex and this is no exception. There are many indexing methods and other 'moving parts' and this does create a lot of confusion when comparing these vehicles. Furthermore, there are many ways for the insurance companies to limit your gains so it is important to know what indexing method is used and what its advatages and disadvantages are. And for my true 2 cents here...Whoever called them 'EQUITY' index annuities wasn't thinking. That is the most misleading name in the world. When you truly know how these work, you will understand why I say this.]
Before you buy an EIA, you should understand the various features of this investment and be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether an EIA is right for you. [Okay, let me be the first to shock you...Many professionals have no idea how the equity index annuity really works. That is not to take away from those who do. However, these are vehicles with many different features. On the surface, they all look good, but until you read the fine print, you may never know. This is where most people get caught. Even professionals in the industry get confused with these vehicles. How do I know? There are so many seminars for agents about how they really work and how to explain them and they are always packed. Furthermore, it is good to do your own homework. And it is even better not to take it for granted that your professional knows how they work. Do some research and examine whether or not your annuity agent knows how the equity annuity really works.]

Ignorance Is Not Bliss>>>>More to Come Each Day!!!

Just a couple of resources I would like to make you aware of. These are not necessarily recommendations, but just some places to give you insight. Take them or leave them!!!

Investment Resources

More Annuity Resources

Realestate and Foreclosure Resources
Realestate and Foreclosure Resources II

Stockmarket Resources
Stockmarket Resources II

Fitness Resources (A hobby of mine)

Great article I picked up on Equity Indexed annuities. This is from Quatloos.com and it came from http://www.quatloos.com/equity-indexed-annuities.htm. Even though it is from 2002, I find most of it, actually, almost all of it, still applies. I will be commenting on this piece frequently for the next few days. For now, please read this and absorb it. I would like to provide my commentary in detail. Thank you.

Equity-Indexed Annuities - A Complex Choice

January 16, 2002

Why a Brochure on Equity-Indexed Annuities?
Sales of equity-indexed annuities (EIAs) have grown considerably in recent years. Although one insurance company includes the word "simple" in the name of their product, EIAs are anything but easy to understand. One of the most confusing features of an EIA is the method used to calculate the gain in the index to which the annuity is linked. To make matters worse, there is not one, but several different indexing methods. Because of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one EIA to another.
Before you buy an EIA, you should understand the various features of this investment and be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether an EIA is right for you.

What is an Annuity?
An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. If the payments are delayed to the future, you have a deferred annuity. If the payments start immediately, you have an immediate annuity. You buy the annuity either with a single payment or a series of payments called premiums.
Annuities come in two types: fixed and variable. With a fixed annuity, the insurance company guarantees both the rate of return and the payout. As its name implies, a variable annuity's rate of return is not stable, but varies with the stock, bond, and money market funds that you choose as investment options. There is no guarantee that you will earn any return on your investment and there is a risk that you will lose money. Unlike fixed contracts, variable annuities are securities registered with the Securities and Exchange Commission (SEC). To learn more about variable annuities, read our Investor Alert, Should You Exchange Your Variable Annuity?

What is an Equity-Indexed Annuity?
EIAs have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity.
EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.
Caution! Unlike variable annuities, EIAs are typically structured so that they are not securities registered with the SEC. Nor are the sales of EIAs regulated by the SEC and NASD. This means that non-registered EIAs are not subject to the customer suitability, disclosure, and sales practice requirements that registered securities are.

What is the Guaranteed Minimum Return?
The guaranteed minimum return for an EIA is typically 90% of the premium paid at a 3% annual interest rate. However, if you surrender your EIA early, you may have to pay a significant surrender charge and a 10% tax penalty that will reduce or eliminate any return.

How good is this guarantee?
Your guaranteed return is only as good as the insurance company that gives it. While it is not a common occurrence that a life insurance company is unable to meet its obligations, it happens. There are several private companies that rate an insurance company's financial strength. Information about these firms can be found on the New Jersey Department of Banking & Insurance's Web site.

What is a market index?
A market index tracks the performance of a specific group of stocks representing a particular segment of the market, or in some cases an entire market. For example, the S&P 500 Composite Stock Price Index is an index of 500 stocks intended to be representative of a broad segment of the market. There are indexes for almost every conceivable sector of the stock market. Most EIAs are based on the S&P 500, but other indexes also are used. Some EIAs even allow investors to select one or more indexes.

How is an EIA's index-linked interest rate computed?
The index-linked gain depends on the particular combination of indexing features that an EIA uses. The most common indexing features are listed below. To fully understand an EIA, make sure you not only understand each feature, but also how the features work together since these features can dramatically impact the return on your investment.

1) Participation Rates. A participation rate determines how much of the gain in the index will be credited to the annuity. For example, the insurance company may set the participation rate at 80%, which means the annuity would only be credited with 80% of the gain experienced by the index.
2) Spread/Margin/Asset Fee. Some EIAs use a spread, margin or asset fee in addition to, or instead of, a participation rate. This percentage will be subtracted from any gain in the index linked to the annuity. For example, if the index gained 10% and the spread/margin/asset fee is 3.5%, then the gain in the annuity would be only 6.5%.
3) Interest Rate Caps. Some EIAs may put a cap or upper limit on your return. This cap rate in generally stated as a percentage. This is the maximum rate of interest the annuity will earn. For example, if the index linked to the annuity gained 10% and the cap rate was 8%, then the gain in the annuity would be 8%.

Caution! 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. Read your contract carefully to see if it allows the insurance company to change these features.


Indexing Methods. As described in the table below, there are several methods for determining the change in the relevant index over the period of the annuity. These varying methods impact the calculation of the amount of interest to be credited to the contract based on a change in the index.

1) Annual Reset
Compares the change in the index from the beginning to the end of each year. Any declines are ignored.
Advantage: Your gain is "locked in" each year.
Disadvantage: Can be combined with other features, such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.

2) High Watermark
Looks at the index value at various points during the contract, usually annual anniversaries. It then takes the highest of these values and compares it to the index level at the start of the term. Advantage: May credit you with more interest than other indexing methods and protect against declines in the index.
Disadvantage: Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early. It can also be combined with other features; such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.

3) Point-to-Point
Compares the change in the index at two discrete points in time, such as the beginning and ending dates of the contract term.
Advantage: May be combined with other features, such as higher cap and participation rates, that may credit you with more interest.
Disadvantage: Relies on single point in time to calculate interest. Therefore, even if the index that your annuity is linked to is going up throughout the term of your investment, if it declines dramatically on the last day of the term, then part or all of the earlier gain can be lost. Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early.

Index Averaging
Some EIAs average an index's value either daily or monthly rather than use the actual value of the index on a specified date. Averaging may reduce the amount of index-linked interest you earn.

Interest Calculation.
The way that an insurance company calculates interest earned during the term of an EIA can make a big difference in the amount of money you will earn. Some EIAs pay simple interest during the term of the annuity. Because there is no compounding of interest, your return will be lower.

Exclusion of Dividends.
Most EIAs only count equity index gains from market price changes, excluding any gains from dividends. Since you're not earning dividends, you won't earn as much as if you invested directly in the market.

Can I get my money when I need it?
EIAs are long-term investments. Getting out early may mean taking a loss. Many EIAs have surrender charges. The surrender charge can be a percentage of the amount withdrawn or a reduction in the interest rate credited to the EIA.
Also, any withdrawals from tax-deferred annuities before you reach the age of 59½ are generally subject to a 10% tax penalty in addition to any gain being taxed as ordinary income.

Do EIAs and other tax-deferred annuities provide the same advantages as 401(k)s and other before tax retirement plans?
No, 401(k) plans and other before-tax retirement savings plans not only allow you to defer taxes on income and investment gains, but your contributions reduce your current taxable income. That's why most investors should consider an EIA and other annuity products only after they make the maximum contribution to their 401(k) and other before-tax retirement plans. To learn more about 401(k)s, please read Smart 401(k) Investing.

Is it possible to lose money in an EIA? [Tony's Comment: This is not Properly Explained---You CAN NEVER lose money in an EIA if you hold it until maturity since it is a fixed annuity---I will explain this tomorrow]
Yes. Many insurance companies only guarantee that you'll receive 90% of the premiums you paid, plus at least 3% interest. Therefore, if you don't receive any index-linked interest, you could lose money on your investment. One way that you could not receive any index-linked interest is if the index linked to your annuity declines. The other way you may not receive any index-linked interest is if you surrender your EIA before maturity. Some insurance companies will not credit you with index-linked interest when you surrender your annuity early.


If You Have Questions
If you have questions about EIAs, you can contact your state insurance commissioner. You can check out whether the person selling an EIA is registered with the NASD check their Web site or call their Hotline at 800-289-9999.

Additional Resources
NASD Investor Alert, Should You Exchange Your Variable Annuity?

National Association of Insurance Commissioners' Buyer's Guide To Equity-Indexed Annuities

Securities and Exchange Commission's Variable Annuities: What You Should Know


Ignorance is Not Bliss.

We will be discussing this document in detail over the next few days.

More Equity Index Annuity Resources at http://www.annuitymd.biz/annuity/index.htm.

Agents and consumers beware. American Marketing Insurance Leads may not be what they are cracked up to be. Let me share a story with you without getting into too much detail.

The hardest part of being in the insurance or annuity business is finding qualified prospects. Yes to all of you consumers out there, you are actually a commodity to the industry and being able to find you is a valuable game. Companies charge $20-$100 PER LEAD to agents willing to pay. Now, consumers don't be alarmed. The sales game in any industry is played this way.

Now, the problem is the quality of the leads is not always easy to determine unless you pay for some leads and test them out. American Marketing Insurance Leads claims that not only will they give you a lead, but they will set the appointment for you. Well, if this sounds great...you haven't heard the whole story.

When I was personally selling annuities, my corporation decided to use their services to see if they would work out well. Not only do did they overcharge us and NOT deliver the number of leads, they LIED to people blatently on the phone to get an appointment for us. We also had an incident where they actually promised the prospect that our agent would bring out a check for them just for meeting. It was embarassment after embarassment. Nonetheless, after experiencing this, we kindly asked for our money back and they promised they would send it and never did. $2,500 down the drain. They continuously lied to us telling us they would send the money but never delivered.

Oh, further proof...They had over 60 Better Business Bureau complaints last I checked. So if you are considering using American Marketing Insurance Leads, save your money...you'll be much better off.

By the way, here is an actual response to our complaints. This is how the Better Business Bureau said American Marketing Insurance Leads handled the complaint:


American Marketing Insu - CMPL NO: 10375610

Regarding the company you filed about
American Marketing Insurance Leads
269 South Beverly Drive, #1020
Beverly Hills, CA 90212

Although we have tried to obtain a response to your complaint from the company in the hope of reaching a mutually acceptable resolution, they have ignored our requests. We are, therefore, closing our file.

Your unanswered complaint will become part of the information we report to the public on this company for the next three years. Also, should any government agency request our files on this company, your complaint will be included.

If that isn't proof, I don't know what is. Unanswered complaints are not a way to build a long lasting business. Anyway, this is just my personal experience and I thought you might want to know. Good Luck.

Ignorance is Not Bliss.

Index annuities are supposedly going to account for 50% of all annuity sales in the next year. Can you believe that? What is it about this annuity that has captivated the whole industry. Many types of annuities have come out in the past, but the index annuity has definitely been the one that has caught the most attention. So what is all the hype about?

Let me be the first to tell you that Index Annuities are not stock market alternatives. Nor are they designed to outperform the market. Index annuities are really designed to give you a little more potential than fixed annuities without the additional risk. The basic idea of an index annuity is to get a portion of the upside of the market and avoid the downside. It sounds too good to be true but it's really not. They don't give you all the upside and as a tradeoff you don't get the downside.

The problem with index annuities isn't the concept. It has boiled down to 1 of 2 things. First of all, there are agents that try to make them sound like the answer to all of your prayers. Well, some of them are good and have good features but they certainly have their limitations. Furthermore, some insurance companies give an unlimited upside the first year but bury information about how they are going to mitigate your gains later on in the contract years.

Perhaps the biggest problem with the index annuity is not the concept but how they are presented. First and foremost, if it is too good to be true, then it probably is. A good solid index annuity will give you good upside in the good years, protect you from the down years and lock in your gains every one to two years. Even in the contract, there may provisions built in to protect the insurance company, such as the ability to lower your upside, but don't let that scare you. A good company builds those in for the bad times and only lowers your upside potential if they absolutely have to. They do it for their protection AND FOR YOURS. The bad ones normally sound so good to lure you in and then lower your potential after the first year. These especially include the index annuities with huge upfront bonuses. So if it actually does sound to good to be true, then you may want to be extra careful. Good companies don't have to offer huge incentives or make it sound too good to be true to get you in.

As I always say, however, it is good to know what you are looking for before you go look for it. Do your due dilligence once you find it and make sure it fits your needs. Index annuities, the right ones, can be a great alternative to fixed annuities and CD's---but not for everyone. Always do your homework and know what you want and don't want and seek the help of a professional you can trust before making any decisions. Most importantly, please remember...

Ignorance is not bliss...

http://www.AnnuityMD.com

One thing that is hard to find is a good resource for annuity information. The problem is, most of the information is biased. The news media has all the negative information you could think of because that's what sells. The annuity sellers have all the good information so they can sell you an annuity. Therefore when looking for an annuity resource, you have to beware.

It is wise to do as much research as you can before getting involved...with anything. Make sure you know your source and the ulterior motive, if there is one. Always be on the lookout for what the hidden agenda behind the information is. And last of all, don't believe it until you see it. That means if you are buying annuities, see the contract regardless of what your annuity agent tells you about it. See it in black and white to believe it.

Ignorance is Not Bliss.


Sincerely,

Tony Bahu
CEO
AnnuityMD.com

For more annuity resources, please go to:
http://www.annuitymd.biz

Here is another article on annuity scams. This also involves the living trust mill. It was reprinted with permission from the Athertonian which is a newsletter for Atherton residents.

Message from Your Police Department: Living Trust Investments

The Police Department would like to remind Atherton residents to be cautious about a crime industry specifically designed to exploit the financial insecurities of one of our most vulnerable populations – senior citizens.

The Department has received several complaints about companies offering free home meetings to discuss identity theft, Medicare issues and “Living Trusts.” The concern is that these companies might be trying to sell inappropriate financial investments for some seniors, namely annuities. These “Living Trusts Mills” use scare tactics to pressure seniors into investing into these annuities, even though these annuities may make the seniors’ savings inaccessible for 15 to 20 years, carry severe tax penalties, have exorbitant “surrender charges,” and create complicated estate problems after death. The representatives of these companies misrepresent themselves as experts in estate planning and identity theft. They gain the trust and confidence of the victim, and then misuse that trust to discover the extent of the client’s assets under the pretext of determining whether the client can benefit from the living trust.

Please be wary of any uninvited solicitations from people or companies you don’t know or trust. One such company, The Gentry Group, has been ordered to desist and refrain from advising people or selling securities in order to buy annuities until they have secured certificates authorizing them to conduct business as investment advisors in California. This has not stopped them from contacting citizens of Atherton and offering them a home visit.

If you would like to report an incident of an inappropriate solicitation of a senior regarding these “Living Trusts Mills,” please contact the Atherton Police Department at 688-6500.

For more information, please read the brochure from the Federal Trade Commission at: www.ftc.gov/bcp/conline/pubs/services/livtrust.pdf

Ignorance is Not Bliss!

Tony Bahu
http://www.AnnuityMD.com

Well, the other day, we talked about annuities and living trust mills. I just found this article on an annuity scam that has been unveiled and I think it is great that authorities are picking up on this now. I picked this up at the California Department of Insurance website.

This is one thing you NEED to be aware of at all times:

Allianz Life recently released a report that comes as no surprise. There are annuity agents out there who are wrapping up annuity sales by either posing as 'estate planners' or by including it in the 'estate planning package' when the attorney does his thing.

Now, this is no surprise. People are most vulnerable at the time of change. What does mean to you? Well let me explain. When you are trying to do your estate planning, the goal is to avoid estate taxes and probate. At that time, you begin to re-title your assets to put them in your trust. Many documents have to be signed and at that time, so much change is going on that annuity agents try to take advantage and slip in a few annuity sales at the same time. This is called the 'Living Trust Mill.' I like to call it the old switcheroo...

In fact, Allianz says, 'The representatives frequently misrepresent themselves as experts in estate planning. They gain the trust and confidence of the client, and then seek to use that trust to discover the extent of the clients assets under the pretext of determining whether the client can benefit from a living trust.'

Yes, no surprise. The industry is full of scams. My hats go off to Allianz Life Insurance company for exposing this and for stating that they will terminate agents who participate in any such actions.

So be careful...I just thought you might get something out of this information and hopefully you or nobody you know ever gets in this predicament.

Ignorance is not Bliss

Tony Bahu
AnnuityMD.com

For more information on Annuities and Retirement planning, please go to:
http://www.annuitymd.net/retirement-planning-advice.htm

There has been a lot of questions asked about Allianz annuities...are they good or are they bad? Well, just like anything else, it always depends on the investor's needs. Every company has good and bad vehicles, but what makes them so are whether or not they match the investor's goals.

Even the greatest investments can be nightmares if they don't match the goals of the investors. So if you are wondering about Allianz annuities, the concept is still the same...What's right for you?

For more information on the difference between good and bad annuities, please visit:

Annuities: The Shocking Truths Revealed (Click on the link to visit)

Sincerely,

Tony Bahu

For more information and resources on annuities, please visit:
http://www.annuitymd.org

---Are Annuity Rates Going Up and Is Now the Time to Invest in a Fixed Annuity?

That is the age old question. In fact, a similar type question is asked when people consider investing in the market...Should I invest now or wait until it comes down. Now as much as you might think that rates are going up, or the market is coming down, the answer is, you never know.

Interest rates don't always do what we expect them to do. Furthermore, sometimes future rate hikes are already priced in. That's why often when Greenspan raises rates, market interest rates don't always necessarily get higher. In fact, if the market anticipates a higher interest rate hike and doesn't get it, CD and annuity rates come down AFTER RATES GET RAISED. Furthermore, much of the time, the stock market doesn't do what we expect it to do either.

No matter what the case, investing should be done based on a plan. The same goes for annuities. Someone looking to get into fixed, variable, or equity indexed annuities should do so according to a plan, not the market. The market can change in a heartbeat...one terrorist attack can send the market tumbling and one great event can send the market soaring. Therefore, it never makes sense to invest based on market conditions. Rather, it makes sense to invest based on a plan. And waiting only makes sense if your plan calls for waiting.

With that in mind, here is soemthing that may help when it comes to fixed annuities and indexed annuities. While we don't know what the market is going to do tomorrow, we do know that the market is constantly changing. When investing in annuities, the way to take advantage of ever-changing markets is to have annuities come due in certain time periods. It is a strategy better known as laddering. If you adjust your annuity portfolio such that there are annuities coming due every one to two years (ex. a 5 year, 7 year, and 9 year annuity), you can re-evaluate your decision every couple of years starting in year 5. Furthermore, if rates are worse in 5 years and you can't get anything better, there may be continuation provisions in your 5 year annuity. Furthermore, you have your 7 and 9 year annuity that you picked up when rates were better in the past that are still working for you. And if rates are better, then you can take advantage of them at the time.

Again, this is not meant to be financial advice, but just an idea to consider. Often times, too many people put all of their money in to one 10 or 15 year annuity. This does not allow flexibility, if that is what you want. Again, if your situation calls for one annuity for a long time period, no problem. But if you want the opportunity to take advantage of different markets at different times, then take a look at laddering your annuities, just like someone would ladder bonds or CD's.

Ignorance is Not Bliss!!!

Tony Bahu
CEO
AnnuityMD.com
http://www.AnnuityMD.com

This was posted in the San Diego Tribune on March 20th, 2005 and it was written by Lynne O'Shaughnessy:

A sure thing? Better to avoid those equity index annuities

March 20, 2005


How would you like to invest in a sure thing?

If you sink your money into this amazing investment, you can kick back and enjoy nearly all of the glorious gains of the stock market for many years to come. But, here's the really unbelievable part. When the stock market does its occasional imitation of a 20-car pileup, you'll walk away without a scratch. That's right. You won't lose any money.


Does it get any better than that? Not if you listen to the insurance agents and other commissioned salesmen who hype something called the equity index annuity. After listening to its boosters, you'd swear this annuity will be a shoo-in for canonization because it appears to be the answer to every skittish investor's prayers.

But folks, if you are hoping this is a miracle investment, it isn't. This annuity, however, is a godsend for the eager agents, brokers and commissioned planners who peddle them. The enthusiastic sale force is rewarded with huge commissions and they get to lob a big fat sales pitch down the middle of their potential customers' living rooms.

Who, after all, wouldn't want to earn generous stock market returns without risking any cash? This pitch especially appeals to investors who remain intimidated by the stock market's volatility, but who naively believe there is a way to strike it rich without putting at least a finger or two on the chopping block.

When you look closely at EIAs – and most people don't bother – the blemishes are clearly visible.

There is plenty to dislike about equity index annuities, beginning with the name, which is a true marketing coup. Despite what the name and the glossy handouts suggest, these annuities aren't risk-free stock investments; they are just dressed-up fixed annuities.

Like a certificate of deposit, a fixed annuity offers a modest return on an ultraconservative product. The equity index annuity differs from a traditional fixed annuity because of the way interest is credited to its value. The interest for the typical fixed annuity is determined by the rate dictated in the contract. The EIA credits interest with a complicated formula that is based on changes to whatever index, such as the Standard & Poor's 500 index, it is linked to.

If you examine the EIA's potential for impressive stock market returns, it's arguably as flimsy as a Hollywood stage set. For starters, an annuity's upside potential is limited. The contract's participation rate dictates what percentage of market gain is credited to an account.

You might, for example, earn 70 percent of any gain in the S&P 500 or the Dow Jones industrial average. But that figure is misleading because the percentage isn't tied to an index's entire gain. In this example, the calculation would be based on 70 percent of the index's return, minus the performance generated by dividends.

Historically, about 4 percentage points of the Standard & Poor's return of 10.4 percent can be traced to dividends. So when you disregard dividends, you kiss a lot of an annuity's return goodbye.

There is also a cap on the gain you may be anticipating when the market starts racing like a Triple Crown winner. Many other factors also determine how each one of these annuities is credited. In the industry, there are dozens of different crediting methods.

Now let's look at the downside protection. One of the attractive selling points of these annuities is that no matter what is happening on Wall Street, customers are guaranteed a certain base annual return over the life of the contract.

It could be 2 percent or 3 percent. But what many people don't understand is that this return is often not based on what you sink into an EIA. It can be based on a portion of it. If you invest $100,000, you may only get the guarantee on, say, $85,000.

One of the biggest deal breakers with these annuities is the commission. Agents are rewarded with commissions that can hover in the 10 percent to 15 percent range. Onerous surrender charges are another turnoff. In extreme cases, if you want to bail from one of these annuities, the insurance company will confiscate 20 percent of your money before releasing what's left.

So what is your reward for this expensive peace of mind?

Glenn Daily, one of the nation's foremost fee-only insurance consultants, suggests that during bad years on Wall Street, EIA investors would be better off owning a plain old fixed annuity or certificate of deposit.

During periods when the markets are smoking hot, investing in stock mutual funds would be a smarter option. Let me translate that for EIA customers: Heads you lose. Tails you lose.

Luckily, there are plenty of alternatives for EIAs, which all investors managed to live without before they were introduced in 1995.

If you absolutely can't afford to lose money, you can stick your money in a certificate of deposit, a fixed annuity or a money market. You could also diversify your risk with a conservative asset mix. You could, for instance, place 80 percent of your money in bond index funds and 20 percent in stock index funds.

If you've soured on your equity index annuity (say in the time it took to read this far into the column), you are inevitably going to wonder what you should do. Fleeing is always an alternative, but you may pay dearly in surrender charges. You'll want to find out what your charges would be since they decline the longer you hold the annuity.

Another option is to pay someone to analyze the contract, but there aren't many professionals who can even crack the code. When the state of California, for instance, was developing 403bCompare.com, a Web site for teachers to analyze annuity and mutual fund choices in their 403(b) retirement plans, the developers struggled with the tortuous EIA provisions.

"I was working with some very bright people and their minds were spinning," recalls Scott Dauenhauer, a fee-only financial planner in Laguna Hills who was a consultant on the project.

Because of the complicated return formulas, Daily said, it could even take him several hours to thoroughly understand just one contract.

You may want to think long and hard about asking an insurance agent, or someone else who lives off commissions, for advice on your next move. An agent may advise you to bail from that big, bad old annuity and transfer the money into one that's infinitely better. Yeah, right.

If you own an equity index annuity, consider it a valuable learning experience. And vow that you will never invest in anything again that you don't understand.

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Lynn O'Shaughnessy is the author of "The Retirement Bible" and "The Investing Bible." She can be reached at LynnOShaughnessy@cox.net.

End of Article---Now for My Comments...

Now, I have something to say about this ridiculous article. First of all, it is clear to me that this person DOES NOT UNDERSTAND what an equity indexed annuity is or how it works.

Now, I am not sticking up for EIA's (equity indexed annuities) but I am sticking up for knowing what the heck you are talking about.

Equity indexed annuities are complex and there are agents who are doing a terrible job selling them...furthermore, they are not for everyone nor are they the answer to every investor's dream. And if someone is selling it like that, well then shame on them.

However, if you understand them, you can use them to augment your portfolio wisely. Here's the deal...while they don't provide the same returns during the bad time as a fixed annuity can, and they don't provide the same upside as a mutual fund can, they can do something totally different.

They are designed to give someone the "opportunity" to earn more than traditional fixed annuities in the good years and not take losses in the down years. The fact that this article states that investors would be better off owning pure fixed in the down years and mutual fund s in the up years is ABSURD. When was the last time you knew how the market was going to perform???

Sorry, thanks for playing. WHEN INVESTED IN PROPERLY, the EIA can help give more enhanced returns in the good years relative to fixed annuities, and avoid losses in the down years relative to mutual funds---That is not a recommendation but an invitation to look at these vehicles from an UNBIASED standpoint.

I am truly sorry but I am very disappointed by this article. IT is written by someone who didn't do their homework. Again, there are many EIA's that can limit investor's gains, but there are some that can enhance an investor's gains also. Yes, they are certainly not the "answer to all investment problems" but nothing is. As I always state, do your homework and invest wisely. IF anyone states that a vehicle can answer all of an investor's problems, that is a lie. But for someone to poke at a vehicle that has particular advantages without knowing the facts, that is truly ignorant.

Equity indexed annuities CAN be a good thing if used properly. Ask an mutual fund investor who lost 20% if they would have traded an equity indexed annuity that had minimal gains for that year and they would undoubtedly say yes. Ask a fixed annuity investor who only earned 4% if they would trade for an EIA that earned 8% that same year and you might get the same response.

Sorry Lynn, but I think you missed some key points for this article. While I think you were right by stating to not invest in a vehicle you don't understand, I think it is ignorant to say that the EIA in whole is a bad vehicle...but it's okay, maybe you were just in a hurry and didn't do your homework!!!

Ignorance is Not Bliss!!!
Tony Bahu
http://www.AnnuityMD.com
Annuities: The Shocking Truths Revealed

http://www.AnnuityMD.org
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