Equity-indexed annuities are one of the most abusively sold investments offered by brokers today. This is because their complexity, high fees and commissions, and long lockup periods are oftentimes misrepresented. Brokers are able to sell them to investors because they tout downside protection when markets deteriorate and generous upside potential when markets surge. Unfortunately, investors are never told the truth about equity-indexed annuities, which is also attributable to the brokers themselves not understanding how they work.
An annuity is a form of insurance that offers a series of payments for a period of time. An annuity can be either fixed or variable. Fixed annuities are invested in conservative investments, and the return to investors may vary, but a minimum rate of return is established. Variable annuities are higher in risk when compared to fixed annuities and depend on how the stock market is performing. Variable annuity buyers have the option to allocate the cash invested into different asset classes such as mutual funds, indices, fixed income investments or bonds, and money market.
Equity-indexed annuities are complex products that are hybrid of both fixed and variable annuities. Their returns vary more than a fixed annuity, but not as much as a variable annuity. So, equity-indexed annuities are more risky than fixed annuities, but less risky than a variable annuity. Equity-indexed annuities offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, equity-indexed annuities have less market risk than variable annuities. Equity-indexed annuities also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.
But equity-indexed annuities come with fees that are higher than any investment, the greatest sales commissions to brokers, and consequently the greatest surrender charges. Commissions to brokers can go as high as 12%, and surrender charges can be as high as 18%. Investors also take "haircuts" without fully understanding why the value of their account is decreasing. One example of a "haircut" is a performance cap, which limits upside potential, and it is often further reduced by a participation rate. Another example is the market value adjustment, which can significantly reduce an account's value if a client chooses to make withdrawals.
Some insurance companies have chosen not to sell equity-indexed variable annuities. Some of those companies included are New York Life, Prudential, TIAA-CRFF, and Met Life. Reason being is probably because very few people understand equity-indexed annuities, including the brokers who are selling them.
Have you suffered a loss of principal in your equity -indexed annuity? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at firstname.lastname@example.org for answers to any of your questions about this blog post and/or any related matter.