Quinn, Jane Bryant, Newsweek
Byline: Jane Bryant Quinn
Here's an investment product you'd be smart to avoid: an "equity-indexed annuity" that promises safety combined with stock-market growth. Such a product does exist--it's called a "variable annuity" (for the pros and cons, see NEWSWEEK, May 8). But these indexed annuities are a different animal. Their link to stocks is murky, their costs are both hidden and high, and they're so widely mis-sold that state and federal regulators are getting worried.
How does an equity-indexed annuity work? Sold by insurance companies, it credits you with tax-deferred interest every year. The amount of interest depends on a complex formula vaguely connected with how the stock market performs. If the market falls, you usually get zero. If it rises, you'll get some small fraction of the gain.
What does it cost? You can't find out. All the costs are hidden from view. Even worse, the sales material may claim "no annual fees, no investment charges, no front-end sales loads. …