Just say No
Equity-indexed annuities are appealing. It's a contract that allows the annuity buyer to enjoy some of the upside performance of the stock market while eliminating the downside. What's not to like about that? Problem is, equity indexed annuities are complex, opaque, costly and disappointing investments.
Equity indexed annuities are a profitable product for the insurance company. It offers a lush commission to the seller. But it's a bad deal for the buyer.
While that protection may be attractive to investors who saw the S&P 500 plunge 38 percent in 2008, the contracts' complex terms and embedded fees make them unlikely to perform as well as expected, said Kent Smetters, a professor of insurance at the University of Pennsylvania's Wharton School.
"These contracts have really high hidden fees," said Smetters, a former U.S. Treasury Department economic policy official. "That's why they're terrible ideas for older people even though they're peddled to them."
Imagine, in most cases you would do better putting your money into certificates of deposit--even at today's low rates. If downside protection is important to you I would put the money into FDIC-insured bank products (and the credit union equivalent) or into U.S. Treasury securities. There is no free lunch, sad to say.
I'm not a fan of long-term care insurance. The need for the product is genuine. But the devil is in the details and long-term care insurance keeps coming up short. The always smart Anne Tergesen of the Wall Street Journal details the latest long-term care insurance snafu.
About 8 million Americans own long-term-care insurance, which helps cover the cost of in-home care or nursing homes and assisted-living facilities.
The reasons for claims denials vary. When compared with modern-day coverage, some policies issued 20 years ago have tougher requirements, such as mandatory hospital stays, before benefits are paid out. As a result, even those with severe disabilities, including Alzheimer's patients, may have trouble filing claims.
To be sure, her story emphasizes that the problems are concentrated in older policies. There have been improvements over the years. Yet I'm not sure how confident anyone can be in the soundness and reliability of their long-term care insurance.
Some fear recent turmoil in the industry may lead to more claims rejections. Citing factors including higher costs than projected, companies including John Hancock Financial and MetLife have recently applied for or received approval in one or more states for rate increases of as much as 40%. Some carriers, including MetLife, even have stopped issuing new policies.
Warning bells go off whenever the main advice to protect yourself is to reread the policy's fine print and to hire an expert to prepare for making a claim. It's good advice. But does it mean the insurance product is fundamentally flawed? .
All I can say about this next story is, It's about time. The Securities and Exchange Commission is recommending a common fiduciary standard for brokers and registered investment advisers who provide personalized investment advice. I'm not sure if Congress will go along with raising standards on the money managing community, however.