Much of the financial industry is hurting these days, and you can bet that Wall Street is working overtime to hook investors in one way or another. Insurance companies are promoting a product that looks (at least to them) like a winner, especially during tough times.
You can barely pick up a financial publication lately without seeing ads for fixed indexed annuities, often called equity index annuities. The ads promise a lot. But does the product deliver the goods?
Many investors seem to think so. An estimated $26.7 billion went into equity index annuities in 2008, according to AnnuitySpecs.com’s Advantage Index Sales & Market Report. I think there are three main reasons. First, they offer downside capital protection at a time when nothing seems to be working for investors. Second, they seem to offer market-like returns. Third, sales representatives are being paid high commissions to push them.
If you haven’t seen or heard the pitches for equity index annuities, you probably will before long. Wall Street has identified this as a profitable product – profitable, that is, for Wall Street.
Here’s what you may be told: With a fixed indexed annuity you get a guaranteed minimum rate of return or the return based on an underlying stock index, whichever is higher. What could be nicer? Upside potential and no downside risk. Wall Street would like you to believe that finally somebody has devised a product that’s on your side all the way.
Technically, the claims are accurate. If you wait long enough (think about up to 16 years), you can get all your money back plus some return. However ……. (more…)