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Baby Boomers Beware: Equity Indexed Annuities

I'm straying from my usual format to address a growing concern that affects more and more seniors and almost-seniors.  In this economy and uncertain financial climate, many retirees look for a way to invest their hard-earned lifetime of savings in something "safe."  Yet, they don't want to miss out on a way to earn interest at the same time.Elderly woman

There are many financial planners and insurance agents out there who look to take advantage of baby boomers ' parents (or baby boomers themselves) who have money to invest.  They sometimes sell a type of annuity called Equity Indexed Annuities, or EIA's. 

These financial products usually come with lofty promises -- your money is guaranteed to be safe, so it won't ever go down, but you'll still earn money when the stock market goes up.  Sounds great, right?  Sign me up!

Not so fast -- there's a reason this sounds to good to be true.  There's a catch with Equity Indexed Annuities.  Some EIA's are good investments for the right people in the right circumstances.  Others are not.  How do you tell the good ones from the bad?

Let's start with the basics.  What is an Equity Indexed Annuity?  It's a type of insurance product that works as an investment.  The person buying it invests his or her money into the annuity, which is guaranteed at a minimum rate of interest (under certain conditions), but is also linked to the stock market.  Theoretically, if the market goes up enough in a given year, the annuity will increase, but if the market goes down, the investment doesn't. 

Nothing too bad so far.  So where are the hidden dangers?

First, EIA's typically have "surrender fees".  What are these?  If you want to sell the annuity, or withdraw money (generally, anything over 10% in a year), you have to pay a price.  Sometimes these surrender fees are manageable -- they have a six or seven year period, with fees starting at 5 to 7 %. 

The problem?  I've seen many EIA's with surrender charges of up to 20% or even 25%.  That's right, you may lose up to a quarter of every dollar you take out (once you get past the annual 10% "free" withdrawal).  These surrender periods can also be long -- I've seen them in the 10 to 15 year range.  This means that you would have to wait 10 to 15 years to take out your own money.

For someone young, this may be worth the wait.  But, again, we're talking about baby boomers and even their parents.  I've seen these products sold to people in their mid to late 80's.

What happens if someone needs to go into a nursing home, or assisted living?  What if someone had large medical bills?  What if someone wants to buy a condo, or give money to a loved one to help out?  Most commonly, what happens when someone elderly needs to pay for a caregiver to come to the house and provide help so they don't have to leave home?

If most or all of the savings are tied up in an annuity like this, it's tough luck.  While there are, sometimes, narrow exceptions for nursing home admissions (which are very, very limited so that most people won't qualify for them), everyone else is usually stuck between a rock and a hard place.

The sad part is that some of the "professionals" who sell these products try to convince people to put as much money as possible into EIA's because they get HUGE commissions.  In some of my cases, the commissions were in the 13% or 14% range (meaning the salesperson gets paid that percentage of the money invested). 

How can insurance companies sell EIA's that have such a high commission?  They earn it by keeping the money for a long time.  (These annuities are considered to be a form of insurance, so insurance companies are the ones who create them -- but, it's always local agents of one form or another who sell them).

I'm not saying that all agents who sell EIA's are doing this.  But there are enough bad apples in the bunch to warrant caution.  The first question to ask, to help sort out the good from the bad, is about the surrender fees. 

The second big "catch" to many of these products is that they can sometimes be so complicated, convoluted and confusing, that many of the insurance agents or financial planners selling them do not even fully understand them.  For example, often, the money is only guaranteed under certain conditions.  Also, the investment doesn't go up except when the stock market goes up A LOT (in some cases; a modest amount in other) in a given year, and even then the annuity will only increase in a very small amount. 

There are participation rates, minimum floor guarantees, cap rates, various indexing methods, margin or administrative fees, as well as different valuation, averaging and calculation mechanisms.  We're not talking about simple stuff here. 

In fact, during one of my EIA cases, I asked the financial planner who sold the annuities to an elderly woman to explain to me, during a deposition (where he was under oath to tell the truth), how the investments worked. 

He didn't know. He said he'd have to study the insurance company's brochure to find out.  I asked him if he meant the 12 page, single-spaced, small font brochure that said it was a "brief overview of product features"?  He responded by saying something to the effect of "Yes, that's the one."  How long did he need to study it for?  At least 24 hours, he replied.

A full day of study for the agent who sold this annuity to understand how it works.  Yet he felt the elderly client had actually understood what she was getting into when he convinced her to buy these.

Does this sound hard to believe?  It is.  But, the most shocking part is how many of these annuity salespeople are trained to sell the products.  Dateline went undercover to expose how these are sometimes sold with lofty promises and hidden details. 

Watch the NBC Dateline feature on Equity Indexed Annuities and see for yourself.  Or you can read the S.E.C. warning bulletin about Equity Indexed Annuities.  

The moral here:  Never, ever let anyone you care about purchase one of these annuities unless the buyer is fully, 100% aware of what he or she is getting into.  Look first at the surrender charges.  If the person buying it can't live without the most of the money during the surrender period, even in case of emergency, he or she shouldn't be buying it. 

And if your parent does buy them, he or she should never put all -- or even most -- of his or her money into the annuity.  A certain amount is acceptable under the right circumstances, but only when the purchaser is fully aware of all of the risks, complications, fees and penalties.  But remember that it's never wise to put too many eggs in the same basket.

Now for some good news.  If you, or anyone you know, has purchased an unsuitable EIA, an experienced attorney can often help undo the damage.  In fact, for the large majority of people who come to see me about shady EIA's, I have been able to recover all of their money without even filing a lawsuit.

But, that only works if it is done before it is too late.  Every state has different laws, and different time limits for bringing claims based on unsuitable annuity sales.  In Michigan, that time limit is generally three years (but can be longer under certain circumstances).  But, my experience as a Michigan lawyer addressing elder law issues may not be the same as that of attorneys in other states.

The important thing to keep in mind is that if the buyer talks to an attorney early enough, there may be a way out, quickly and relatively inexpensively. 

But the best cure is prevention.  Spread the word.  Talk to your baby boomer friends and elderly loved ones.  Watch the Dateline video.  Never, ever let anyone you know buy an annuity unless there is full understanding of what the risks and benefits are.

Keep in mind that not all indexed annuities are bad or inappropriate.  There are many good agents and planners who sell these products as part of a legitimate retirement strategy.  But there are many bad ones as well.  So be careful, and get a second opinion if there is any doubt.

Posted by:  Author and probate attorney Andrew W. Mayoras, co-author of Trial & Heirs:  Famous Fortune Fights! and co-founder and shareholder of The Center for Probate Litigation and The Center for Elder Law in metro-Detroit, Michigan, which concentrate in probate litigation, estate planning, and elder law.  You can email him at awmayoras @

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