No other investment option stirs up as much controversy as equity index annuities, both pro and con. Annuity IQ has even touched upon the topic in our blog and has ruffled some feathers to say the least. The question that is always asked is: “are they any good?”

There is really no good answer to this question, as all products have their pros and cons; however equity index annuities are, generally, not high on our list of good products. While the premise of the product is outstanding, upside potential with no downside risk, the structure of most of these contracts is less than what would be desired.

Anyone who could look someone in the eye and say that an equity index annuity with a 12 year surrender schedule (starting at 12% or higher), a monthly averaging and a cap of 8%, and a 10% commission to the agent is a good investment is not being honest with the person they are selling it to or themselves. Seniors are the target of these investments, as it hits all of their “hot buttons”-- guarantees with the promise of higher than normal returns.

However, the fact that these products are so complex and offer such limited upside does not make them suitable investments for many seniors. Especially considering some of these contracts will make the beneficiary pay the surrender charge if the owner dies while still holding the contract. The other favorite of ours is the two-tiered products which force the owner to annuitize to realize the gains in the contract otherwise they will simply get the minimum guarantee if they wish to lump sum their investment at the end of the term.

We get the argument for the investment, upside potential with no downside risk and it is for “safe” money. The problem is that there are plenty of safe investments out there that do not contain moving parts, caps and participation rates. These products are called fixed annuities. Now why aren’t fixed annuities sold as hard as equity index annuities?  Simple, the compensation is not as high.

If an adviser can sell a traditional fixed annuity they may receive 5% or slightly higher commissions. However, if they can sell an equity index annuities, well then the commission can be 10% or higher. This is the problem-- the compensation on the equity index annuity is so high it makes people want to sell them, and why not-- they can work half as hard and make the same money.

The litmus test on these products should not be the surrender schedule or even compensation.  It should be based on whether or not the CEO of the insurance company would recommend this product to his mother or grandmother. We can guarantee you that the vast majority of CEO’s of these firms do not own one of these products or have their parents’ money in them.

The simple reason they would not own them is because they know the product is sub-par at best. While not all of these products are bad, the vast majority of them with all of the caps, spreads, yields, asset fees and with no dividends being paid the investor will probably not fare much better than a traditional fixed annuity product. Keep in mind that with a traditional fixed product, the principal is, generally, guaranteed and in many states, insurance companies cannot invade principal even if the owner closes out the contract within the surrender schedule. Oh, and they are far less complicated as well.

While fixed annuities are not as sexy as equity index annuities, they do make better sense for many investors, especially seniors. One also must keep in mind that many annuities are not right for seniors at all. Just because someone is older does not automatically make them a candidate for an annuity of any kind. If the product fits their needs then it is a good investment, but those who sell annuities, especially equity index annuities, to people by scaring them to death should not be in the financial advice business at all.

We do not think anyone should treat seniors like 12 year olds or scare them into a sale. Unlike the people that do conduct this behavior, we like and love our elders and want to make sure we do things that are right for their needs. Certainly scaring them into buying something so you can buy an expensive watch or a new flat screen TV cannot be worth providing bad and self motivating advice, can it?