Never Buy an Equity-Indexed Annuity

The equity-indexed annuity (EIA) is a candidate for the worst investment product ever invented (a high-fee unmanaged index fund may be the worst). A major selling feature of an EIA is that it gives investors tax-deferred interest each year. But the amount of the interest is computed using a difficult-to-understand methodology related to the performance of the stock market and fees charged by the insurance company who sells you the annuity contract. The Security Exchange Commission lists the factors included to determine the annual interest: participation rates, interest rate caps, margin/spread/administrative fee, and indexing method. Good luck in understanding all of the fine print.

Moreover, the high fees charge by the seller are usually not disclosed when you buy the contract. So you have no idea how much of money goes to the seller before you see a return. Also, you'll be charged a hefty surrender fee if you attempt to terminate the contract before a preset date - usually 10 years or more.

Just say no to this product.

Posted May 24, 2006.