Equity-Indexed Annuity Complex
Leo and Sally Maestripieri of New Bern, N.C., have noticed a new trend: Insurance agents bombarding retirees such as themselves with pitches for equity-indexed annuities. They have heard five presentations, with two home visits from reps. The Maestripieris want to know what to do.
Normally, when you hear "annuities" and "free seminars" in the same breath, it's easy to give advice: Run, Leo! Run, Sally! Save yourselves! All too often, the answer to every problem at these seminars boils down to one word: annuities.
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Equity-indexed annuities offer juicy commissions, which is one reason people like to sell them. And EIAs aren't regulated by the National Association of Securities Dealers or the Securities and Exchange Commission. Those two reasons alone should get your feet moving. But some EIAs can be OK. Sometimes.
An EIA, like any annuity, is a contract with an insurance company. Fixed annuities agree to pay you a set rate, determined by the contract. Most have a minimum rate, typically 3 percent, and your earnings are tax-deferred until you withdraw them.
EIAs set their rates according to the performance of a stock index, such as the Standard & Poor's 500. A typical EIA might give you 85 percent of the annual rise in the S&P 500, to a maximum 12 percent a year. Your minimum rate would be 3 percent, even if the stock market falls.
EIAs are appealing because the stock market, in a word, stinks. Had you invested $10,000 in the S&P 500 the past three years, you'd have lost 12 percent in 2001, lost 22 percent in 2002 and gained 29 percent in 2003, assuming dividends were reinvested. A $10,000 investment would be worth $8,422. Had you invested in the EIA above, you'd have earned 3 percent in 2001 and 2002, and 12 percent in 2003. Your account would be worth $11,882.
Even with limited upside, eliminating the downside is appealing, particularly in a long, nasty sideways market. An EIA with a 12 percent cap and 3 percent floor would have beaten the S&P 500 throughout parts of the snake-bitten 1970s.
I bought two annuities this year and was extremely satisfied with the service from Immediate Annuities.com each time. In short, their staff was courteous, professional, and prompt. I would recommend them to anyone who wants to buy an annuity.
If you're looking for simplicity, you won't get it from EIAs. You have to look carefully at:
- The index. Many EIAs use a simple price index for the S&P 500, so you don't get the advantage of reinvested dividends.
- Participation rates. Whether you get 100 percent of the index's gain or 70 percent depends entirely on the contract.
- Withdrawal rules. If you make large withdrawals before a certain period, you get smacked with surrender charges.
- Financial strength. An EIA is only as good as the company that writes the contract.
- Regulation. Insurance products are regulated by the states, bypassing the NASD and the SEC.
- Potential for losses. Many EIAs guarantee 90 percent of your principal, plus 3 percent minimum return. If you withdraw early, you could lose money.
- Taxes. Withdrawals from an annuity are taxed as income.
Source: enquirer.com - 07-31-2004