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title: What About Equity-Indexed Annuities (and SPIAs) description: [S.12.26] Securities Objection #26 published: true date: 2026-06-30T08:12:12.266Z tags: editor: markdown dateCreated: 2021-11-17T02:04:35.681Z

“I think fixed annuities are cancer, the same as all bonds are cancer. All fixed-income is cancer. Its death on the installment plan. Its the planned liquidation of purchasing power within your lifetime.” ―Nick Murray, Interviewed by Barry Ritholtz, Masters in Business 2015

“Disingenuous life insurance or annuity products that offer the return of the index, with dividends stripped out, should be avoided like the plague. Imagine giving up 29% of the return over a twenty-year period!” ―David Bahnsen


External Research

Read FINRA Investor Alert - Equity-Indexed Annuities: A Complex Choice ARTICLE

Read Annuity Warning #5: Fixed-Indexed Annuities by AnnuityFYI ARTICLE

Watch Indexed, Fixed Annuity vs Variable Annuity VIDEO

Dateline

The link to Dateline videos doesn't work at the moment. But if you Google it you can find.

I just watched Dateline NBC?s "Tricks of the Trade" seven part undercover series on equity-indexed annuities. This is a must watch for everyone. It is pathetic the lengths that some people will go to to make a sale.

For instance, one of the video segments shows an annuity training program called "Annuity University". At this training session, sales agents are able to purchase books that they did not write but can put their names on anyway to make it look like they are the book's author. They can even purchase a magazine that will insert the agent's picture along with a fake question-and-answer article with the agent inside the magazine. Even though this probably isn?t illegal, it sure as heck is misleading. It gives fake credibility to the agent.

I also enjoyed the conversations with Joseph Borg, Director of the Alabama Securities Commission, and Minnesota Attorney General, Lori Swanson.


Equity-Index Annuities (EIA) Myths

First of all, we can offer just about every type of annuity from almost every carrier, however, fixed annuities and indexed annuities are very poor retirement and investment vehicles.


Myth #1: They give you market participation.

This is completely false. They "index" your returns to the market. The index EIAs use doesn't include dividends (which is a major part of the returns of the stock market).

Then, many EIAs perform any or all of the following calculations before you get credited:

  • Annual Cap - maximum you can earn in any given year.
  • Participation rate - Percentage of the market you will get.
  • Monthly averaging - Makes it about 65% of the index return.
  • Point-to-Point - When you chose this option they lower your cap (over monthly averaging).
  • Spread fees - less common these days but still exist.

An indexed annuity is not a securities product at all because the customer's money is not actually invested in the world's great companies. and has NOTHING to do with the market. It is a form of fixed annuity (like a fixed insurance) policy. That's why the sales people selling them don't need a securities license.

The fact that you don't get the actual return of the market is reason alone is enough to make them a bad deal.


Myth #2: You can't lose money

This is incorrect. EIAs are extremely non-liquid. They often come with very long and very high surrender charges. Which means that they give you a fictitious account value that they say "doesn't lose money" ...unless you want to take it out within your surrender period. Then you get penalized severely.


Equity-Index Annuities vs Variable Annuities

They say that variable annuities have high fees, which, compared to mutual funds with no guarantees is true. But, where the lie comes in is that they say Equity Indexed annuities have no fees which while "technically" true, is a misrepresentation. They have caps, spreads, participation rates, and other manipulative strategies which reduce the clients return. They don't have fees, they have a "calculation" for how they compute the return - which results in actualy returns be lower that the market, and that difference is the "cost".

So, for example if a sub-account in a VA had a 12% average return and the fees on the contract were 3%, the client would average 9%. Not a CAP of 9% in a given year, an AVERAGE. If an indexed annuity has an 8% cap, don't mistake that to think that this product could average 8%. 8% would be the MOST it could EVER get in a given year. 8% one year and 0% the next averages out to 4%.

In securities we constantly (and gladly) run historical illustrations for various time periods. For example, if you were going to buy the Investment Company of America, I could run every 20 year period since 1934 and tell you the high, median, and low 20 year returns (net of all fees, by the way. FYI: it's always around 12%) Why don't equity indexed annuities show these same illustrations? Because NO ONE would ever buy their product.

Remember, that these are fixed annuities. No matter what they tell you, the actuaries at the insurance companies are using FIXED instruments which are tied to FIXED interest rates. When interest rates are low you are going to see returns that mirror fixed return products (savings accounts, CDs, etc..) Can you imagine if fixed rates are paying 3% and an actuary designed a product that paid 8% over that time period? If you were the President of the insurance company what would you do to that actuary? You would fire him.

I would say that equity indexed annuities are okay for some people who want fixed returns, but the high surrender charges make that not true either. Why not go to a savings account or a CD and least have flexibility. Bottom line is that the products are sold by people who are not qualified to advise on securities because they usually don't hold the proper designations.

When I say we do what's right and DO care about what we sell, one of the major areas I am talking about is these products. They are a consumer ripoff, sold as something they are not, with too many drawbacks. Why do agents sell them? Very simple...COMMISSIONS! The commissions are huge on these products.


The primary difference is being an OWNER vs. a LOANER.

Ownership is stocks. Stocks are an ownership interest in a company, getting dividends for their profits, and participating in their growth. A mutual fund (and mutual funds within a variable annuity) is a method of owning stocks, but not just one. Many of them. This diversifies the risk of any particular company and creates a balance.

Loaning money is fixed or indexed annuities, banks, savings accounts, etc. You are giving lending your money to an institution who will pay you back a specific "fixed" amount or an "indexed amount" which is still the same as fixed. In exchange, they get to use your money and make a spread. The institutions get RICH off of the spread.

In variable annuities you are investing in sub-accounts (which are like mutual funds) and invest in stocks and bonds. You get 100% of what they do! The insurance company charges you a fee to administer the program or insure you above and beyond what these accounts do.

Bottom line is that in indexed annuities the insurance company gets all the upside, in variable annuities the client does. Indexed annuities they don't charge you a fee, but instead limit your earnings. In a VA you don't get your earnings limited, but you pay a fee for the insurance you want. The Rule of 72 illustrates the difference.

  • $5,000 compounded at 6% over 48 years = $80,000
  • $5,000 compounded at 12% over 48 years = $1,280,000


Single Premium Immediate Annuity (SPIA)

Here is what Grok says after my prompt.

As someone who’s been all-in on equities for decades—100% in low-cost equity mutual funds, exactly the way Warren Buffett has recommended for the vast majority of people, I see a Single Premium Immediate Annuity (SPIA) as the exact opposite of my investment philosophy. It’s basically handing a big lump sum to an insurance company in exchange for a fixed monthly check for the rest of your life. Sounds simple and “safe,” but from a long-term compounding perspective, it’s a non-starter.

Here’s why I pass every time:

  1. It sacrifices the power of equities for a guarantee that’s usually overpriced. Buffett has spent his career showing that owning wonderful businesses (or broad equity indexes that own them) at reasonable prices is the way to build real wealth. Historical equity returns have crushed the implied returns built into SPIAs after the insurance company takes its cut, builds in its profit margin, and invests the money far more conservatively than I ever would. I’m not willing to lock in today’s annuity payout rates when I can keep my money working in a low-cost S&P 500 or total stock market fund that has compounded at roughly 10% nominally over the very long run.

  2. It’s irreversible and illiquid. Once the check clears, that capital is gone forever. No rebalancing, no tax-loss harvesting, no ability to adjust if inflation runs hot or markets present a generational buying opportunity. I like keeping control of my capital. Buffett didn’t get rich by giving up control.

  3. Inflation is the silent killer here. A plain-vanilla SPIA pays a fixed dollar amount. Unless you pay up for a costly COLA rider (cost-of-living adjustment), your purchasing power erodes every year. Equities, over time, have been the best hedge against inflation we’ve ever had. I’d rather own the companies that raise prices than be the customer who gets stuck with a check that buys less every year.

  4. Longevity protection is nice, but I’d rather self-insure with stocks. Yes, a SPIA solves the “what if I live to 105?” problem. But I believe the same goal can be achieved by staying fully invested in equities, spending responsibly (think a flexible 3–4% withdrawal rate adjusted for market conditions), and letting the portfolio keep growing. The historical data is overwhelmingly on the side of equities for anyone with a multi-decade horizon—even in retirement.


Bottom line:

If someone is extremely risk-averse, has no heirs, or is truly terrified of sequence-of-returns risk in early retirement, a modest SPIA might have a place as part of a broader plan. But for anyone who shares my (and Buffett’s) core belief that a low-cost, diversified equity portfolio is the simplest and most effective way to build and preserve wealth over a lifetime, SPIA is a product I’d politely decline.

I’d rather keep every dollar invested in American business, compounding tax-efficiently for as long as possible. That’s the philosophy that’s worked for me, and it’s the one I’ll stick with until the day I die.