No. of Recommendations: 3
Some interesting, though not surprising, findings from former SEC economist Craig McCann.

Equity-indexed annuities are complex investments sold by insurance companies that pay investors part of the capital appreciation in a stock index and guarantee a minimum return if the contract is held to maturity. Sales of equity-indexed annuities have soared in recent years despite the impenetrable formulas used to calculate their likely returns. Equity-indexed annuities to date have been regulated by state insurance commissions, rather than by the Securities and Exchange Commission and the NASD. In this note, we provide an overview of equity-indexed annuities. We also sketch how they can be valued. 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.


We performed a Monte Carlo simulation on the two investments pictured in Figure 3 based on realistic assumptions and determined that 96.9% of the time the investor is better off with the Treasury securities and stocks than with the equity-indexed annuity. That is, investors sold this example annuity would be worse off 96.9% of the time, even if they held the annuity to maturity and it performed exactly as designed.


In other words, if your financial advisor is recommending one of these high-fee products to you, he's just this side of being a crook.

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