Equity Index Annuities

By Bryan J. Anderson

Few products generate as much confusion and controversy as fixed indexed annuities, both pro and con. I am often asked if these products are any good.

Want the Straight Talk? For the right person, they can be perfect, but for those who are given few or no other options, they can be dead wrong.

The premise of a fixed index annuity is attractive- it is promoted as a high yield safe investment, and often wrapped in marketing ploys and other names, like 'hybrid annuities' or a mysterious 'hybrid annuity plan.'. But skilled salespeople can make anything look good by highlighting the best possible scenario and glossing over the worst case. In reality, equity index annuities do expose investors to the risk of little to no appreciation, while capping appreciation and imposing some fees.

Fundamentally, a fixed index annuity links the annuity appreciation rate of the annuity account balance to a stock market index- the income generated by the underlying bond portfolio owned by the annuity contract is invested in market options. your downside is protected, yet you are open to some upside participation, Seems like a good idea, right? Eliminate the cost of managing a mutual fund in your sub-account and you should produce better returns by simply tracking the market, right?

Well, what is rarely explained is how the annuity return is calculated. Insurance costs, dividend exclusions, surrender charges, maximum gain caps.... These and a host of other exclusions and contract fine print usually leave an equity indexed annuity owner unhappy.

To understand the critical components of picking a fixed index annuity, you need to truly understand you own needs and motivations to determine if it's right for you. Some of the risks with Fixed Indexed Annuities are:


•Long surrender charges, even charges that survive the life of the annuity holder and are assessed to the heirs!
•Two-tiered products which force the holder to annuitize their account balance to get even the guaranteed minimum rate. In other words, the guarantees and floor returns are only valid if you convert your equity indexed annuity at the end of the deferral period into an annuity payment stream, otherwise you're only entitled to your paid in premiums with 0% gains.
•Dividend exclusion: Some companies remove dividends from their calculation of the index return. Excluding dividends takes 2-4% off the equity index annually!
•Index appreciation rate caps- most companies will cap your appreciation rate, even if the index does much better.
•Timing- when index returns are calculated can have a dramatic effect on the return.
•Surrender fees


So what is a retirement saver to do? What else is out there that is safe, offers guarantees, and has a good yield? Simple- consider fixed annuities and high quality secondary market annuities.

Fixed annuities are not as glamorous or in favor, but they are simpler products, their returns are much safer, and their risks much lower. Why aren't they promoted as often? That's a good question that is answered thoroughly in The Annuity Report.

And Secondary Market Annuities are a relatively new offering to consumers, previously fully absorbed by larger corporations.


Bryan J. Anderson is the Author of The Annuity Report at AnnuityStraightTalk.com, and offers great free resources on Fixed index Annuities Bryan also helps you understand all the benefits of Secondary Market Annuities and Guaranteed Annuities, and finds the best combination of safety, flexibility, and profitability for your money.

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