You probably have heard from most investment professionals what types of investments you should own. Some of them may work out, some may not. I am taking a different route with this article. I am telling you about products that usually benefit the sales person more than the client. This list of investments is not all inclusive, the bottom line in investing, if you don’t completely understand it –- stay away! There are too many choices in the investment world; you don’t need to invest in an area where you are completely relying on your adviser for guidance. I'll start with Equity Indexed Annuities

Equity Index Annuities (EIA) have to be one of the worst investments. They play on people's fears. The fear that the market will wipe away their savings. EIAs are deferred annuities similar to variable annuities. EIAs promise stock like returns with no downside risk. Here is what the sales person will not tell you:

1. You do not get all of the upside of the market.

The index differs from contract to contract; let’s just use the S&P as an example. The contract will cap the upside of the market in any given month. In other words, if the S&P is up 10% in any given month you may only get a 7% credit. These contracts usually don’t cap the downside. For example, if the S&P is down 20%, your rate calculation goes down 20%. The company then averages these monthly calculations to achieve a yearly return. Your account will not go down over the year, but your returns can be significantly lower than the overall market. Let’s take a look at an example:

Month:	100k in Market	Value	100k in Equity Index Annuity	Value
1	10.00%	$110,000.00	7.00%	??
2	-20.00%	$88,000.00	-20.00%	??
3	5.00%	$92,400.00	5.00%	??
4	15.00%	$106,260.00	7.00%	??
5	0.00%	$106,260.00	0.00%	??
6	-15.00%	$90,321.00	-15.00%	??
7	6.00%	$95,740.26	6.00%	??
8	8.00%	$103,399.48	7.00%	??
9	-3.00%	$100,297.50	-3.00%	??
10	5.00%	$105,312.37	5.00%	??
11	6.00%	$111,631.11	6.00%	??
12	10.00%	$122,794.22	7.00%	$101,000.00
		22.79%	1.00%	= Average Interest

This sounds confusing doesn’t it? They make them confusing on purpose – Don’t buy what you don’t understand.

2. These contracts have very long surrender periods.

The surrender period could be as long as 15 years. This is a long time to wait when you figure out you made a mistake. They are structured this way so they can recoup the extremely high sales commissions paid to your sales person. Commissions to the broker can be as high as 15%. The commissions are high because these products are very profitable to the insurance company and usually not very effective for the client.

3. These contracts are very expensive to get out early.

If you realize you have made a mistake with this investment, or you have liquidity needs that you didn’t foresee, these products could cost you between 12 and 25% of your deposits in the first year. Now that is an expensive mistake. They have to make the surrender charges high in order to recoup that high commission they paid your sales person if you get out early.

4. The name is a misnomer - there are no equities.

EIAs are fixed products. The interest rate you receive is based on how the index performs as discussed above. This means the people selling them do not have to have equity licenses they only have to have an insurance license.

The rules for these products are all over the board. The bottom line is there are other ways to protect your downside risk. If you have questions regarding equity index annuities please send me an email.