An equity-indexed annuity is a contract between an investor and an insurance company in which the investor agrees to make payments to the insurance company throughout a set accumulation period and the insurance company agrees to make periodic payments to the investor once the accumulation period ends. During the accumulation period, the insurance company takes the payments made by the investor and credits the investor with a return that is based on an equity index (i.e. the S&P 500). Typically, a guaranteed minimum return is promised to the investor.While the annuities sound like an ideal investment vehicle, there are numerous problems associated with them, including: lack of disclosures, high potential for abusive sales tactics, and hidden costs and fees.On its website, FINRA warns investors about the annuities, saying: "EIAs are anything but easy to understand." It further cautions: "Some EIAs allow the insurance company to change participation rates, cap rates, or spread/asset/margin fees either annually or at the start of the next contract term. If an insurance company subsequently lowers the participation rate or cap rate or increases the spread/asset/margin fees, this could adversely affect your return." According to a July 6 CBS Moneywatch.com article by Jane Bryant Quinn, the SEC was concerned enough about the potential investor risks associated with equity-indexed annuities that it had planned to regulate them after an industry review was conducted. However, according to Quinn, the insurance industry lobbied to prevent the regulation, and instead of leaving the annuities within the SEC's jurisdiction, the financial reform bill left the industry's oversight in the hands of the states, thanks to a change inserted by Iowa Democrat Sen. Tom Harkin.
