Equity Index Annuities: Risks and Drawbacks to Consider

Equity index annuities are a type of annuity that many people choose to invest in. However, this type of annuity has a few drawbacks associated with it. If you are considering this type of investment, here are a few reasons that you should hesitate.

1. Leaving Early

If you decide to get out of your annuity contract before the full term has been reached, you will have some financial concerns to worry about. You may have to pay significant surrender charges as well as a 10 percent tax penalty. This means that unless you know that you can keep the money in the annuity for a certain period of time, this would not be a good investment.

2. Interest Rate Caps

This type of investment carries with it an interest rate cap. This means that your annuity can earn only a certain percentage of return regardless of what happens in the market. This limits your potential as an investor.

3. Fees

This type of investment is also known for charging excessive fees to investors. For example, you might expect to pay 3 percent for the management of the annuity. This is going to be substantially higher than other forms of investment and can quickly eat up your retirement savings.