Annuities: Equity-Indexed Annuities: The Investment From Hell

If you were nearing the edge of the cliff and didn't know it, would you want someone to warn you before it was too late? Of course you would. That's been the guiding principle of this column, to inform everyday investors of the pitfalls that could cause them and their nest egg irreparable harm.

I've been hearing from many of these investors lately. Some of them got the message before they stepped off the cliff. For others, the warning came too late.

Over the past several years I've been sounding the alarm bell due to the inherent dangers found in equity indexed annuities (EIAs). And the message is being heard. I've recently issued detailed reports on EIAs in general and one specifically on the most popular EIA on the market, the Allianz MasterDex 10. In these free reports, I explain the risks and pitfalls to you that the person selling them doesn't. Too bad that Greg's grandpa didn't know the truth. Greg explains: "Back in 2000, my Grandpa was talked into buying one of these by an agent. He was planning on just withdrawing the interest each year to live on. Well, for the first 6 years, they distributed 10% of his initial investment. Recently, he has come down with terminal cancer, and wanted to get out.

"He asked for a full withdrawal, knowing that he'd have to pay the 4% (surrender) penalty. Well, his total withdrawals over the seven years came out to less than 90% of his initial investment! Reading through the contract, it looks like he wasn't supposed to start receiving distributions until 2015, when he would 98 years old! Does this sound right to you?"

No, Greg, it doesn't sound right to me. But unfortunately, that's how some of these EIAs work. The truth is written in the fine print of the contract, which most people fail to read, much less understand.

Fortunately, Jim read his contract, and just in time. Jim said, "I meet with an advisor. He recommended the Allianz MasterDex 10, since at the time they were offering a 12% bonus up front. After he went through his talk it sounded good so I rolled my IRA over into it. That was the first time I saw the booklet, when he laid it out for me to sign, and I did. Upon getting home, I read it and saw I had messed up, thank goodness for the 'three day cooling off period.'

"I called him back and stopped the deal. I get cold chills when I think how close I come to really messing up. I thought he was on my side and was trying to help me out, when all he was trying to do was help himself to my money. I'm glad I got on the internet and found you. You answered even more questions."

Not all agents are unscrupulous. As Mark found out, some of them are just as ignorant to the truth as most investors are. After reading my free report, Mark forwarded it to his advisor. The advisor replied, "I printed the report, talked to the Allianz representative and hit him with each point. I can't believe that they could have BSed me so well. This is a lousy product. You shouldn't buy it and I don't plan on EVER showing it to anyone else again."

I'm glad Mark has an advisor that doesn't put the profit motive above doing what is right for his clients. That wasn't the case for Phil and Donna. Here's their story, in their own words: "We were stupid enough to be swayed into turning my husband's entire 401k into an EIA. Obviously, if we would have understood what we were getting into, we would have run, not walked, away from this! This is really the Investment from Hell!

"We would like to find out if there is anyway out of this mess, without losing almost 25% [in surrender penalties]. This policy made 0% the first year." Even though the market went up almost 15% in 2006, Phil only made 1.5% that year!