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ou get at least a minimum return, but a chance of greater returns according to participation in an index. Brokers, who receive commission of as much as 13% prey on people who are afraid of losing money in the stock market. However, an EIA offers CD-ish safety but with the hopes of greater returns, with two principal risks.
One is the insurance company fails.
Second, investors lose money with EIAs is where they cash them in early, meaning during the surrender period. EIAs are meant as long-term investments to fund retirements, and nearly all EIAs have long surrender periods -- sometimes 10 years or even longer. Few EIAs have less than 7 year surrender periods.
While most EIAs allow some amount of money to be taken out of the cash value of the annuity during the surrender period, the withdrawal of this cash will usually affect the performance of the annuity in a very negative way. So, EIAs should NEVER be used where the investor might need the money during the surrender period.
Sadly, some insurance agents sell EIAs to investors who will need the liquidity during the surrender period. The insurance agent will not perform a liquidity analysis, and sometimes may not even warn the investor that there is a surrender period and steep surrender charges. After a few years passes, and the investor needs the money, only then does the investor find out that there are surrender charges or begins to understand that their money has effectively been tied up for some years.
Any insurance agent or financial advisor who sells an EIA without conducting a liquidity analysis or fully advising their client about the surrender period and surrender charges is liable for at least negligence, and perhaps fraud if he or her sales practices are such that investors are never warned about the surrender periods and surrender charges.
The market for EIAs has exploded in recent years, over an estimated $22 billion in 2005. Unfortunately, the number of unsuitable EIA sales has escalated also. Many people are now suffering financial hardships and having to borrow against their home equity, etc., because they were the victim of an unsuitable EIA sale.
Investors who believe that they have been caught in an unsuitable EIA sale should seek competent counsel to determine whether to seek relief. In egregious circumstances, the insurance companies will work to unwind EIA purchases, and sometimes action against the agent can be warranted.
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