AD Quality Auto 360p 720p 1080p Top articles1/5READ MOREThe top 10 theme park moments of 2019 My beef, from what I’ve seen at more than half a dozen “investment seminars” and what readers tell me, is that some commission-driven “financial advisers” pushing these annuities are not telling the whole story. In the sales presentations I’ve attended (I cannot in good conscience call them seminars), the presenters have exaggerated if not misstated potential returns. They have glossed over if not ignored potential drawbacks. Only one speaker even mentioned the formulas these annuities use to credit interest, or the “caps,” “participation rates” and “spreads” that limit how much interest they would pay compared to the actual stock market index return. All that said, let’s hear good things about equity-indexed annuities. I actually agree with all of them: “Indexed annuities provide a safe haven and potentially can earn more than other safe-money alternatives such as certificates of deposit and traditional fixed annuities – which pay a set rate of interest, known in advance. They are designed to preserve principal while providing a decent return,” said Thomas C. Ewert, a certified financial planner in Wedowee, Ala. “Indexed annuities are not designed to compete with the stock market,” and their returns should not be compared to those of direct investments in stocks, which historically have produced greater returns, said Jim Kealing, a certified financial planner and certified public accountant in Newhall, Calif. Rather, indexed annuities “are designed to fill the void between a straight fixed annuity and the stock market, hopefully providing a better return than a fixed annuity without risk to your principal,” Kealing said. That last point is important. In my previous column I gave an example of how an annuity using a crediting method widely used today would have paid only 5.09 percent interest in 1999, a year the Standard & Poor’s Index went up 21.08 percent. That’s OK, you told me, but I should have pointed out that this 5.09 percent gain would have been preserved in 2000, 2001 and 2002, years the S&P 500 Index was down. So here are the numbers: From Jan. 1, 1999, through Dec. 31, 2002, $10,000 invested in this particular annuity would have grown to $10,590, while $10,000 in the S&P 500 Index would have shrunk to $7,567. “If the market did nothing but go up, equity-indexed annuities wouldn’t exist, and we’d all be sipping umbrella drinks on a beach somewhere,” said Jeff Goettsch, owner of a financial services firm in Mission Viejo, Calif. “But the reality is the market will go down, sometimes drastically, we just don’t know when,” and equity-indexed annuities shelter investors from those losses. Summing up: Although there are no guarantees, “the right indexed annuity can help many people achieve inflation-beating returns over an extended period of time,” Kealing added. “I see the problem as being a lack of discussion about potential returns from the type of crediting methods.” Exactly. The crediting method – the formula used to calculate the interest you get, based on the return of the market index – is critical. There are many such formulas and most are too complex to cover here. My point is that, before buying an equity-indexed annuity, you should insist on being shown how the annuity would have performed under different market scenarios using the least favorable terms allowed in the contract (usually, the insurance company can change the terms, such as lowering return caps, from year to year). While such detailed disclosures are not required by law, you as a consumer can demand it and refuse to buy without one. For more on indexed annuities, you can check out the Web sites www.indexannuity.org, www.annuityfyi.com and www.annuityhq.com. Humberto Cruz offers personal finance advice each Thursday and answers readers’ questions each Saturday. Write him at [email protected] 160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set! Instead of questions, I’m getting barbs today. The people who sell equity-indexed annuities – at least those filling my e-mail in-box with lengthy messages every day – have some bones to pick with a recent column. I’ll give them their say because they make valid points. But first, I want to reiterate that I am not against equity-indexed annuities, just the way many of them are marketed. So you know what I am talking about, an equity-indexed annuity is a type of fixed annuity that pays interest based on the return of a stock market index, such as the Standard & Poor’s 500. In up years, your account will earn interest; in down years, you’ll suffer no loss. Even if the market index is down every year, if you hold the annuity to maturity the worst you’ll do is get a minimum guaranteed interest rate. But if you want your money back before maturity, you’ll get hit with surrender charges if you withdraw more than a certain amount each year.