Are Equity Indexed Annuities A Scam?
The question that seems to race through the minds of most investors is whether or not equity indexed annuities are a wise investment. The situation is so pressing that the National Association of Securities Dealers once questioned the manner in which equity indexed annuities were being marketed and sold and the lack of a body to regulate the manner in which the industry was being handled. However, this is not a question that can be answered lightly without taking the time to understand the basics of the equity Index.
First off, the contract states that you have to invest your money in an insurance company over a period of ten years, it grows without getting taxed. In return, the company is supposed to give you returns based on a certain stock market with an exclusion of the dividends. On top of this, they also promise to deliver minimal returns rates that amount to three percent, which isn’t exactly the best annuity rates but at least its above zero. and what is more, in the event that the market goes down, your investment is safeguarded as it is not affected in any manner and for this reason, majority of investors find it ideal. The only setback is the fact that in the event you withdraw from the investment before the ten years are up, then you lose everything.
Having understood the provisions contained in the Equity Indexed Annuities, let’s revisit the initial question, are they a wise investment? If it were not for the fact that they are a complex investment compared to traditional and fixed annuities, then the answer would be a simple yes and yet, it is not. This is mainly due to the fact that Equity Indexed Annuities contain many penalties, costs and multi-year surrender charges which are hidden and as such, make it impossible for the investor to make sound judgments. This is especially true due to the fact that they promise guaranteed security to the investors.
As stated earlier, the National Association of Securities Dealers have no hand in controlling the marketing of these annuities and as such, by law, there is no provision of prospectus that discloses the terms, conditions and risks involved in equity indexes and to top it all, they can be sold by an insurance agent who does not hold a securities license. For this reason, investors should not be quick to bank on the same without carrying out proper investigations to establish and totally understand the terms used in the provision of the annuity.
Some of the things that ought to be considered include the features that govern the annuity, any tax requirements that might creep up at some point and how they will affect you, return rates expected and how solid they are, liquidity specifications, the duration through which you have to wait before taking out your investment to avoid penalties and all the expenses associated with the annuity with no hidden costs whatsoever. Once you are able to do this, then you will be better placed to decide if it is a scam investment or not. In addition to this, you will be able to avoid falling into the traps of unscrupulous insurance agents.