NCPA - National Center for Policy Analysis


June 5, 2007

The most heavily marketed insurance product, the equity index annuity (EIA), is becoming the most litigated insurance product.  Attorneys general in several states have filed suits against a number of EIA vendors.  In addition, there are now four suits seeking class-action status against Allianz Life, the most successful marketer of equity index annuities, says economic columnist Scott Burns.

The primary complaint in these suits is that the annuities are inappropriate investments for older people and that the buyers were not made aware of the onerous penalties if money was withdrawn before the contract ended.

According to Massachusetts Mutual, one of the largest and most respected life insurance companies:

  • Over the 30-year period ending in December 2003, assuming no dividends (because EIA contracts don't include the dividends of the index's underlying stocks) and a 9.4 percent annual cap on returns (because EIAs generally have some form of upside limit), a typical equity index annuity would have provided a return of only 5.8 percent a year.
  • During the same period, the S&P 500 returned 12.2 percent, including dividends.
  • Riskless short-term Treasury bills returned 6.4 percent a year over the same period.

According to Ibbotson Associates:

  • Inflation ran at 4.8 percent over the period, so the EIA earned just 1 percent over the rate of inflation, with all kinds of strings attached.
  • Unlike common stocks, its return was always taxable at ordinary income rates.

Peter Katt, a nationally known insurance expert, has also examined EIAs and concludes they have little to recommend them.

"Equity index annuities tend to have larger commissions associated with them.  Larger commissions do depress the overall yields, but more important, larger commissions are usually associated with higher surrender charges for longer periods, making them less liquid and less flexible," he says.

Source: Scott Burns, "Another no for annuity," Dallas Morning News, June 3, 2007.


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