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Guarding Your Wealth for Seniors
Equity-Indexed Annuities Exposed as Dangerous for
Senior Citizens
By Jeffrey D. Voudrie, CFP
April 5, 2006 - I don’t like equity-indexed
annuities. I believe they are dangerous to seniors and that they should
be avoided at all costs. I’ve been shouting this message from the
mountaintops the last two years. And people are listening—everyone, it
seems, except the agents selling them!
I want to thank the journalists from The Wall
Street Journal, USA Today, and many local and regional newspapers that
have written about the dangers of equity-indexed annuities. Investors
have been warned by Suze Orman. The securities industry has been
admonished by the National Association of Securities Dealers (NASD).
Class action lawsuits are under way that attempt to protect seniors and
get their money back.
Equity-indexed annuities are mainly sold by
insurance agents with little investment-related training. Many of them
aren’t licensed to sell a stock, bond, mutual fund or even a Certificate
of Deposit. Yet they are ‘qualified’ to ascertain that an equity-index
annuity is better then any other investment. They are right—it is better
for them, but it’s sure not better for you.
These agents are beginning to feel the pressure.
The lead article in the March 2006 edition of The Agent’s Sales Journal
is titled “Index Annuities and Media Negativity”, written by one of the
insurance industry’s strongest advocates of equity-indexed annuities.
The negative publicity, he says, is the result of
“two lawsuits alleging bad agent behavior.” He goes on to say “…this
attention is not questioning the merits of fixed annuities
(equity-indexed annuities), but about lost revenues to the securities
industry.” He concludes “the negative annuity talk will lessen later
this year as reporters find something new to talk about.”
Not if I have anything to do about it! Let me
respond to some of the comments in this article.
First, the author fails to mention that the two
lawsuits are class-action lawsuits, not suits by a few individuals. I
believe additional class-action lawsuits will turn thousands of
attorneys into millionaires much like asbestos-related lawsuits have.
Second, I am extremely critical of their high
commissions and the surrender periods that can last longer than most
marriages. But I am also critical of them based on their ‘merits’.
Equity-indexed annuities’ supposed benefits can be better attained,
without investors being forced to lock up their money.
For instance, most people buy an equity-indexed
annuity because they believe it will allow them to get the return of the
stock market while guaranteeing them a return of at least 3%. Since the
investor must leave their money in the contract usually for 10 years or
more to get those benefits, we’ll use a 10-year time frame for comparing
the alternatives.
Let’s suppose an investor placed 60% of their money
into a 10-year Government guaranteed bond and the other 40% into an S&P
500 index fund and held both for 10 years. I’ve looked at the results of
this for every 10-year period since 1950—529 rolling periods.
Here are some interesting facts. You would not have
earned less than 3% per year in ANY of them! So you get the downside
protection you desire. Unlike equity-indexed annuities, though, you
aren’t limited by what you can earn on the upside.
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The returns were greater than 6%, 80% of the time.
You would have earned an average of 10% per year or more 45% of the
time. Best of all you had access to your money throughout that period
without automatic surrender penalties.
The upside potential is even greater if 100% is
placed in an S&P 500 index fund and all the dividends are reinvested.
Again, there wasn’t a single 10-year period since 1950 that the return
was negative. And you would have earned over 10% per year 66% of the
time.
Third, a white-paper was done by a former SEC
economist and PhD specifically on the merits of EIAs. Here’s the bottom
line: “We estimate that between 15% and 20% of the premium paid by
investors in equity-indexed annuities is a transfer of wealth from
unsophisticated investors to insurance companies and their sales
forces.”
So don’t be fooled by the smooth talking agent
trying to sell you an equity-indexed annuity. Find out the facts, look
at the alternatives and you will quickly see it’s not in YOUR best
interest.
If you have a specific question or would like more
information give me a call toll-free at 1-877-827-1463 or go to
www.guardingyourwealth.com. You can also reach me by email at
jeff@guardingyourwealth.com.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Please
visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive.
Guarding Your Wealth for Seniors are
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens. Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For booking information, email e-mail
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