The Law Planet Blog

The National Association of Securities Dealers ("NASD") has issued warnings to investors regarding the sales of Equity Index Annuities. NASD Investor Information This is interesting because an Equity Index Annuity is treated as a fixed insurance product in Florida and not subject to securities regulation. This allows the unscrupulous insurance salesperson plenty of room for abuse.

Here's the problem with one of the most popular brands of Equity Index Annuities - the annuity values on the account statements are misleading. The only way to get the statement value out of the annuity is to annuitize it over ten years. I have a client who thinks that when she dies, her beneficiaries are going to get the "value" listed on her account statement. In fact, they will only get the value if they take 10 equal payments over 10 years. Hence, the Roach Motel analogy. Your money checks in but doesn't check out.

An Equity Index Annuity is a securities-based product that only requires an insurance license to sell. The performance of the annuity is tied to a market index or blend of market indices. Usually, the annuity's link to the index is capped and/or participates in only a percentage of the index's performance. Further, if the market declines, there usually is no limit on the decline. But there will be a limit if the performance rebounds.

I can barely understand this and I do this for a living. I can only imagine what the inexperienced investor must think. Actually, I know because we have spoken with people who have purchased these hybrid products. They didn't understand them when they purchased the annuity and they could not explain them to me when I asked for a description.

The unfortunate part is that the senior citizens who purchase these products can least afford having their money tied up in this manner. Worse yet, from my view, is that the aggrieved purchaser may have to go to court rather than go to arbitration. And since they are not securities, the attorneys' fee provision of the Florida Blue Sky Law would not apply.

Our advice - if you don't understand it, don't buy it. If you think you've been wronged, do something about it. Don't suffer in silence.

That's the view from The Law Planet, Jupiter, Florida.