A proposal by the Securities and Exchange Commission to classify equity-indexed annuities as securities instead of insurance has generated...

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A proposal by the Securities and Exchange Commission to classify equity-indexed annuities as securities instead of insurance has generated a minifuror.

The vehicles — which had $123 billion at year-end, according to the SEC — combine the promise of regular payments with the potential for stock-market gains. The proposal would have the SEC, instead of individual states, regulate the annuities. Insurance agents stand to lose substantial income if the annuities are sold only by securities brokers.

Critics charge that investors don’t understand the fees often attached to indexed annuities. Surrender charges for withdrawal before a certain period can be as high as 15 to 20 percent, erasing any interest gains, says the SEC.

Chris Cordaro, a financial planner with Regent Atlantic Capital, supports the SEC plan.

“If I bought 100 shares of IBM and I decided it was a mistake, it would cost $10 to get out at a discount broker. If I bought one of these contracts, it could cost me 8 percent to get out, or if you have one of these horrible contracts, it could cost 18 percent to get out.”

Robb Edwards, managing principal at AnnuityWorks, who opposes the plan, says liquidity features that allow withdrawals — typically up to 10 percent a year — without penalty are “a basic feature offered by many, many products.” In return, the products guarantee most of an investor’s principal.

In its proposal, the SEC says “the protections offered in these indexed annuities may give the instruments an aspect of insurance, but we do not believe that these protections are substantial enough.”

Insurance rules vary by state.

“For years, there’s been a tremendous effort by the states, including Iowa, and the major industry players to make sure that the consumers get what they need,” says Jim Mumford, Iowa’s first deputy insurance commissioner. “The SEC has not recognized what the insurance regulators have done in the last two years.”

Edwards acknowledges some marketers gloss over surrender fees.

“There are some carriers out there who have historically promoted and marketed the product in a way that was not helpful,” he says, but that in itself doesn’t justify reclassifying the product.