Equity Index Annuities


Dryer sheet wannabe
Dec 14, 2004
I retired in August and moved to Sun City Grand in Surprise Arizona from Indiana. Free meals abound with folks selling equity index annuities. They sound too good to be true, so of course I am skeptical. What am I missing? :p
We had a discussion not that long ago. In a nutshell, these things are very expensive fixed annuities with embedded euity call options. You could relatively easily assemble a package of simple instruments that would give you more upside at a lower cost. No free dinners, though.

If you really want to know how to replicate these things on your own, ask away, but its not something I would think of as all that attractive. They are selling the sizzle, not the steak.
IIRC, when I read some of the prospectus(s) in depth after an earlier discussion, the catches were:

fee skimmed off the top (always bad).

upside (equity participation part) capped at x% per quarter (or month). x% got you a decent return, but in really good quarters you got screwed. i.e. for a 12% year, with a 4% per quarter cap, if the 12% was 3% each quarter, you were fine. But in reality, most gains are concentrated in a short period of time, so if the 12% was 10%, -1%, 2% 1% for the 4 quarters, you got 4%, -1%, 2%, 1%. or 6%. Yuck!

The catches could change, but just a couple of things to look for in the fine print. I'm sure there were more.....
From Peter Katt's [a fee-only life insurance advisor] articles:

Indexed Annuities: Too High a Price for Market 'Protection'

Not only do you only get the capital apprecation of whatever index, you get to pay ordinary income tax on those gains, instead of lower capital gains tax rates on taxable equity gains.

Read that prospectus. If you still don't understand them, don't put any money there.

- Alec
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