Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Christine Benz | 09-29-2010 03:11 PM

Zweig: Safety Carries a Price of Its Own

Equity indexed annuities have some advantages for investors, but it may be cheaper to 'roll your own,' says the Wall Street Journal columnist and author.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

I'm here today at the Wall Street Journal's office, and I'm talking to Jason Zweig. Jason is a personal finance columnist for the Wall Street Journal and he's also author of several books about money and investing.

Jason, thanks so much for being here.

Jason Zweig: Glad to be here. Actually, thank you for coming here, Christine.

Benz: Well, it's our pleasure.

Jason, you've written several columns and this is kind of an ongoing theme for you. You look at new investing innovations, and you talk about ones you like, or maybe more frequently, ones that you're skeptical of.

Zweig: Correct.

Benz: So, you recently wrote a piece about equity indexed annuities. These are not new products, but they have gained some traction amid sort of a skittish stock market over the past several years.

Let's talk about those products, what you perceive as weaknesses in the products, and you also gave an idea for how investors could create their own synthetic equity indexed annuities.

Zweig: Sure.

Benz: So, let's start there.

Zweig: Yes, I mean, equity indexed annuities are certainly not novel. They've been around for roughly 15 years now, and insurance agents love them. Insurers really like them. They do have some advantages for investors, which shouldn't be overlooked. Obviously, they're an attractive way of generating lifetime income. Your principal generally is protected against loss, and those are very good things and are a large part of the appeal in these products.

However, like most investment products that are marketed on the basis of safety in a time of danger, they are not quite as safe or as foolproof as they look. The main problem is liquidity. Equity indexed annuities generally, if you sell them within the first five to 10 years, you'll pay a surrender charge, if your redemption is substantial, and that charge can take a big bite out of your returns. And one of the problems is that less scrupulous insurance agents make a specialty out of selling products like these to quite elderly people. For example, people over the age of 80, it's quite common, and those people don't have a very long life expectancy and may well incur a surrender charge, when they sort of make the ultimate surrender. And I would argue that's really not fair or appropriate.

Read Full Transcript
{1}
{1}
{2}
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
{1}
{5}
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article
    Username: