AKAMAI MONEY

By Deborah Adamson
Advertiser Staff Writer

Q: I want to move some money into an index type of vehicle. Could you provide some of the pros and cons in comparing an equity indexed annuity versus an index fund? — Miles Silberstein, Palolo Valley

A: An equity-indexed annuity, despite its name, is a very different animal from an index mutual fund. First of all, it's an insurance contract. In exchange for paying premiums, the investor gets regular payments over a set period of time.

For one, the annuity does not necessarily invest in any stocks or bonds as an index mutual fund does. Instead, it tracks an index.

"It's actually a fixed annuity disguised as something that participates in the market," said Geal Talbert, a certified financial planner at Edward Jones in Kane'ohe.

While index funds are known for their low fees, equity indexed annuities are relatively expensive to own.

"Anyone thinking of buying one of those should be careful. They tend to have large fees built into them and a low guaranteed interest rate," said Jim Hunt, a life insurance actuary for the Consumer Federation of America.

Another key difference: in an equity indexed annuity, investors may not participate in the market's full return.

If you invested in an S&P 500 index fund and the index rose by 10 percent in one year, you stand to receive a gross gain of 10 percent. But an equity indexed annuity that tracks the S&P 500 can specify that you will only get a portion of that return — say 70 percent.

So instead of the 10 percent you thought you earned, you have 7 percent, Talbert said.

Another drawback is that your money is tied up much longer than in other types of annuities — generally 15 to 20 years compared with seven years, she said.

You may not be able to cash in your funds within the surrender period without a penalty — typically 15 percent or more of your assets, Talbert said.

This surrender charge declines to zero at the end of your surrender period.

"If you want to participate in the market, an index fund might be a good choice," Talbert said. "If you want a guarantee, you can stick with a fixed annuity, a certificate of deposit or a bond."

The upshot on equity indexed annuities? "Stay away from it," Hunt said.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.