The 2008 bear market scared a lot of investors and has led to a boom in equity indexed annuities sales, insurance products with returns linked to the stock market but with minimum guarantees against loss.
Are these a good investment?
These annuities appeal to investors who want to participate in the stock market’s higher return but dread ever seeing the value of their principal decline.
Sales of these products are strong. In the second quarter of 2012, insurers sold $8.6 billion of equity indexed annuities, which is a six percent increase compared to the same quarter in 2011. However, a professor in the University of Pennsylvania’s Wharton School warns that these products are overpriced and carry long surrender periods.
A professor of insurance at the University of Pennsylvania recently told Investment News magazine, “These contracts have really high hidden fees. That’s why they’re terrible ideas for older people even though they’re peddled to them.” I agree …
My observation is that these annuities are too complicated for most retirees to understand. Promises are made that investors will participate in the upside of the stock market without taking the downside risk. This promise has a great appeal to many would-be investors.
Click here to hear how these promises can be made.
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