If you’re skipping around in this book and haven’t read Bunk 15 yet on variable annuities, go there first, then here. This bunk builds on the other bunk like a bunk bed. Annuity firms know annuities are a tough sale (that’s why they pay such big commissions to salespeople!) and folks are figuring out they get lousy growth plus huge fees. So they created a relatively new product—equity-indexed annuities—sold frequently as having more upside potential than a standard variable annuity. Fair enough, but is it true? There are two basic ways these are sold.

The First Pitch

Growth is guaranteed at a minimum rate (like 6 percent) and investors get full upside participation in the stock market. Who doesn’t want a guaranteed return floor and full upside?

The Catch

The drawback comes from the confusing nature of linking insurance and investments. (Never forget: An annuity is, first and foremost, an insurance contract.) Normally, with these annuities, it’s the income base growth that’s guaranteed, not the actual account value—which fluctuates up and down with the market like any other investment, albeit usually with much higher fees. The income base doesn’t really apply unless you decide to surrender ownership of the account in return for regular distributions based on the income base size.
The problem is, many investors who buy these annuities don’t intend to surrender the account and take income. They may buy them thinking ...

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