No. of Recommendations: 1
bobmazzei, you asked:

<< Recently a fincial planner (sells annuities so I will find another planner), told me about equity indexed annuities. His pitch made some sense, but I am skeptical. What do Fools think about these? >>

Perhaps the FIRST issue you should be trying to decide on is whether ANY annuity might make sense in your portfolio. Do any of the features of an annuity really make sense to YOU to have? Do any of the advantages of an annuity make any sense for YOU to have? Is there any value there to YOU. Then, if an annuity might make some sense to have, you can then weigh just which type of annuity might work best for YOUR set of issues.

Though no one knows one way or there other whether an annuity might be appropriate for YOUR set of issues (since you haven't states the many financial details that should be known), no what can really comment well except to may erroneous assumptions and comment with bias. And you can be sure you can get plenty of bias knee jerk responses in a forum like this.

Perhaps the responses could be more appropriate if you told us just what it was in that “pitch” that made some sense to you??? Otherwise, it's a general consensus to stay away from “annuities,” which is a term typically used here for Variable Annuities without making the distinction of how different “annuities” can be.

<< Are they really based on equities and do they provide any advantages over indexed mutual funds like the Vanguard S&P Index fund? >>

Well, yes . . . . you could say that EIA's (Equity Index Annuities) are “based” on equities. But you have to understand they are NOT actually invested “in” equities like you would have in a Variable Annuity. The poster Telegraph is simply WRONG that you're talking about a Variable Annuity. An EIA is actually very different from a Variable Annuity and is actually more like a non-variable Deferred Fixed Annuity.

You can say that EIA's are “tied to” some equity index like the S&P 500, the S&P400, DJIA, NASDAQ, or some other index. EIA's get their returns from investments in bonds and in derivatives of a particular index. EIA's provide a guaranteed minimum return (maybe 2$ to 3%) and a Cap. So the return within an EIA can never be negative like you might see in a Variable Annuity (thought VA's these days are now have a guarantee of principal riders to minimizes risk). And as you are “tied to” some index, what you earn will be anywhere between the guaranteed minimum and the Cap depending on the movement of a particular index. Also note, if the EIA is tied to the S&P 500, for example, you're earning would not have anything to do with dividends reinvested – which represents about 30% for the Total Return of the S&P 500. It only would have to do with the movement of the index itself.

So, you might be asking yourself what does all this mean. It means your returns can be anything between the guaranteed minimum and the Cap. If the movement from one point to another happens to be negative, then you get the guaranteed minimum rate. You'd never get more than the CAP (and BTW, the Cap can and does change just as the participation rate usually does, depending on the particular EIA you're talking about). The bottom line is that EIA's are designed to give you better returns than the traditional deferred fixed annuities and not have the investment risk that's typically involved in a VA. Note too that EIA do NOT have the expense charges like a VA as Telegraph has suggested. And remember that there are NOT Surrender Charges unless you actually surrender the annuity within the Surrender Period. Though this can be a particularly important issue since these surrender periods can be 15 years.

Some of the main benefits you would get from an EIA are low risk and higher returns than fixed rates (maybe something like 5% to 8%). You're tied to the market with no risk to principal. You get tax deferral. Depending on just which state you're in, you get some good creditor protection (a form of asset protection). You can have acces to some of the money any time withough surrender charges. Perhaps these are some of the things that made sense to you. . . ???
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