Equity Indexed Annuities: Flawed Structure Affects ALL OF THEM

Equity Indexed Annuities: Flawed Structure Affects ALL OF THEM

Equity Indexed Annuities: Flawed Structure Affects ALL OF THEM

“You say you don’t like the equity indexed annuity from company A, but what about the one from this other company?”

I get asked this question about equity indexed annuities all the time–every since I released my groundbreaking Special Report on the Allianz Master Dex 10 back in 2006.

I addressed this question recently in my presentation at a Financial Planner Symposium.  Here’s what I told the other Certified Financial Planners.

(I will be using examples from theAllianz Master Dex X, but I am just as opposed to those offered by Aviva, American Equity, Jackson National, ING, Lincoln National, Midland National and North American Company. )

The problem with equity indexed annuities is structural and it affects all equity indexed annuities.

My wife decorates cakes in her spare time. She does all kinds of cakes—birthday cakes, holiday cakes, wedding cakes—all kinds. The cakes can come in different shapes and sizes, they might have slightly different flavors and the color of the frosting might vary from one to another, but they are still cakes.

So regardless of the shape or flavor or color, each is going to suffer the same problems associated with ‘cake’.

I regular get asked about whether an equity indexed annuity from company A is better than one from company B. I believe that there are inherent flaws in the equity indexed annuity concept. It doesn’t matter what version or company you look at—they are all suffer the same structural faults.

Using the analogy of my wife’s cakes, regardless of the color of the frosting or the flavor, all equity indexed annuities are made from the same underlying cake and, in my opinion it’s flawed.

For instance, all equity indexed annuities require you to make a multi-year time commitment. You have to leave you money in for, say, 10 years in order to receive the benefits. If you need to tap more than a small amount of your money before then, you will have to pay a huge surrender penalty.

The surrender penalty on an equity indexed annuity typically starts around 10%. Depending on the annuity, if you need to get your money before the full 10 years, you may lose some or all of the bonus and some or all of the indexed gains.

I’ll illustrate this. If you put in $100,000 into the Allianz Master Dex X you will get a bonus of $8,000. So at the end of year 1, your annuity should be worth $108,000 plus any gains (if there are any) based on market performance. Let’s say an emergency comes up and you have to get at this money.

If you cash it out before then end of that first year, even though the ‘value’ is around $108,000, you will only get $90,000. In other words, you will have ‘lost’ $18,000 based on the ‘value’ you thought you had and $10,000 based on what you initially put in.

(It works similarly with those offered by Aviva, American Equity, Jackson National, ING, Lincoln National, Midland National and North American Company.)

“But wait,” you say. “I was told that it was guaranteed that I couldn’t lose any of the money I put in.” Uh huh. This is your first realization of the gotcha’s associated with these products. You CAN’T lose any money from stock market losses—but there are many other ways that you can lose money.

Even if you keep the product for almost the full 10 years—let’s say you have to cash it in after 9 years. There are STILL surrender penalties. You would still lose a portion of your bonus. If there aren’t any market performance gains, if you put in $100,000 and cash it in after 9 years, you will only get $105,300. So after 9 years, that’s an average of about ½ of 1% a year.

Another way that you lose money is by not participating in the dividends paid by companies in the S&P 500 index.

The dividends can make up a large portion of the overall return of the index. In 2009, the dividend yield on the S&P 500 was 3.24%. That 3.24% would not have been included in the performance calculation in an equity indexed annuity.

Equity indexed annuities are all designed such that the insurance company controls the maximum amount you can make. That way they can make sure they make a profit whether you do or not.

That is just one reason why I don’t recommend any equity indexed annuities offered by Allianz,  Aviva, American Equity, Jackson National, ING, Lincoln National, Midland National and North American Company.

I’ll explore other reasons in future posts…

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