Stock Market Returns without the Risk…Are you kiddin me? Part 2

There are many problems with these products, but the biggest is that the caps and participation rates they quote you when you first buy the annuity are typically not guaranteed contractually.  In fact, many of the “promises” they make up front are not guaranteed.  They may give you a participation rate of 100% initially, but if you read the contract they have the right to lower it at their discretion.  So if the markets move in a direction that hurts the insurance company, you may find out that they have the right (contractually) to lower your payout to 50%, or your cap to 3-4%.

I know this to be true first hand as my Dad purchased one.  Believe it or not, he was told his participation rate would be 110%.  And it was for the first year!  But when his anniversary date rolled around he received a letter from the insurance company.  You guessed it…they were reducing his participation rate down to 50%, and there was nothing he could do about it because the annuity had a 7 year penalty period if he cashed out early.  And can you guess what his participation rate was for the remaining 6 years?  You got it…50%.  And I’ve heard the same thing from clients of mine who have had these products with caps that started at 10-12% and are now down to 4%.  And if you have one that charges a fee, that fee can be raised contractually.

Another problem with these annuities is the length of time you are locked in to the agreement, called a “surrender period.”  Most of the ones sold today lock you in for 10 years, meaning if you take your money out early you will pay a penalty.  The number one selling EIA in 2011 had a 10 year surrender period and the penalty was 10% for the first 3 years on the contract.  I have also seen higher surrender periods and penalties.  I met with a client a year ago and her surrender penalty was 17% in the first year with a surrender period of 15 years.

So how do you protect yourself?  The easiest way would be to avoid these products altogether, as there are better options for you.  If you ARE considering an Equity Indexed Annuity, then make sure you do your homework.  Make sure you are getting your advice from the right person, which is probably not the person who is pitching it to you.  I recommend getting a second opinion from an advisor who doesn’t earn a commission from the product.

If you have had any experience with an equity indexed annuity (good or bad), please share it with us by leaving a comment below.

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