In the past, I’ve written about Variable Annuities and how I don’t care for them for many, many reasons.
Another product I put into a similar category is the Equity-Indexed Annuity. These are products that claim to provide “equity-like returns” with no possibility of loss. Really? Years ago, I analyzed the prospectus for one such product and found that what they called an Equity-Like return was anything but. The calculation for a given year’s return was taken by adding the 12 monthly returns, with a maximum credit of 2% in any one month. Then, if the year was positive, this was your return. The seller of this product said that in good years you could make as much as 24%, but with zero risk on the downside.
Now, in the two years, 2009 and 2010, you would think that since the index (S&P 500) rose 52% you’d have seen at least in the mid to high teens in your account, right? Hardly. You see, 13 of the 24 months were more than 2% up. In fact, four of those 13 months were over 7% to the positive, so that these 13 months of highest gain averaged 6%/mo. Since each of these months’ returns gets cut to 2%, that’s 4% * 13 or 52% skimmed off the top. The punchline is that in two excellent years, the EAI return was zero based on the crediting equation used. Now, you may ask, what about 2008? Well, zero there as well, of course. Which prompts the question – with high fees, 2%/yr or greater in most cases, and zero returns in stellar years, why botther with these products at all? Why not just stick to treasuries if you are market-phobic? Why, indeed.