Annuities are very very complicated creatures in the investment world but break down into three major categories. A fixed annuity is like a CD, paying out a fixed rate that is guaranteed. Variable annuities are like mutual funds that can get you a higher rate of return if you can stomach the higher mutual-fund like risk. Lastly, there are the hybrid annuities which breaks up your investment into fixed and variable so you get a guaranteed but also get a taste of the hot hot stock market. That seems simple enough until you get into the various species of annuities, the little games they play, and how the fees are structured. Some annuities have commissions as high as ten percent!
CNN Money took a look at three annuities you must avoid at all costs: Equity indexed annuities, IRA rollover annuities, and an annuity swap.
Equity Indexed annuities (EIA) are a bad idea because while their returns are based on a market index, such as the S&P 500, your total gains may be capped percentage-wise or dollar-wise and you may not earn the dividends from the holdings (since you’re not actually holding the stock). Take that and the fact that you’ll suffer penalties if you withdraw within a specified time period, typically calculated in many man years!
IRA rollover annuities are even more ridiculous because they aren’t even necessary. Salespeople will pitch these ideas on the hopes of preying on your weakness while they take high fees which can run as high as 3%.
Lastly, an annuity swap is where the salesperson will tell you your existing annuity is outdated, bad, low-returning, but he or she has one that will beat it and he or she will give you a couple extra percent of your investment right on the spot! The downside of this is that you still pay surrender fees on your old annuity and the new annuity may not be much better.
via CNN Money.