Well Grounded Second Thoughts About Equity Indexed Annuities

Q. I'm 36 years old and have had a "Financial Advisor" for several years. He works for an insurance company and several years ago sold me a TSA indexed (S&P 500) Annuity. I'm now having serious second thoughts about it having read all sorts of negative press about indexed annuities(and learning more about them).

I have about $15,000 in the annuity and used to contribute $250 a month to it that I've recently cut to only $100 a month. I really think my money could earn more elsewhere. The policy has a 15 year waiting period for BAV and the floor is 0.00% for all indexed accounts. Should I quit contibutions entirely and have this be an expensive lesson? Your advice would be most welcome.


A. I commend you on doing some additional research and for rethinking previous decisions. When making investment decisions, it is very important that we look to previous decisions and learn from them so that future decisions can be better. Don't give yourself too hard of a time about the EIA investment you made all those years ago. At the time you were making the best decision you could based on the available information.

That being said, there are several problems with the EIA for someone your age. First, on any tax-deferred products (where you are pushing the payment of taxes into the future), the IRS charges a 10% penalty if you take your money out of that type of product prior to age 59 1/2. Putting someone in their 30's into one of these products unnecessarily ties up the money and severely restricts your options. This money can be moved between annuties through what is called a 1035 exchange, without triggering the 10% IRS penalty.

Second, the performance issue. That's probably all I need to say about this one! When the markets were going up like a rocket your participation was probably limited, while you didn't earn anything during 2000-20002.

Third, in all likelihood, each monthly contribution will have it's own surreder period! If there are ten years of surrender penalties, every time you make an additional contribution, that contribution is locked in for the 10 years.

What should you do?
Stop making the monthly contributions. Put your money into something that gives you complete flexibility and control. I recommend something like a well managed mutual fund or an index fund.

Secondly, each year take out whatever you can penalty free from the annuity. You will have to 1035 this money into another annuity but you can find better ones that have lower expenses and better investment options. Vanguard, for instance, has low-cost variable annutiies that you can use.

Your posted comments on this and other questions are welcome.
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