When Helen Siswein, a retired teacher, heard about an investment that might earn 8% a year and never lose money, she was sold.

"I thought, 'Boy, if the market surges I could make a lot,' " said Siswein, 82. She put about $1 million into four different annuities linked to stock market indexes in July 2003 on the advice of an insurance agent who came to her former home in Bucks County, Pa., after her husband died.

Siswein said the agent did not tell her she was locking up most of her money until her 87th birthday or that there were caps on how much she could earn. It cost Siswein fees of as much as 15% of her account balances to get out of the investments five years later, the contracts show. She says one annuity earned an average of about 3% a year after the penalty was subtracted, while the index it tracked, the Standard & Poor's 500 index, returned 6.3% including dividends.

Investors such as Siswein are buying more equity-indexed annuities, contracts that earn money based on the performance of stock indexes and don't decline in value if held to maturity. While that protection may be attractive to investors who saw the S&P 500 plunge 38% in 2008, the contracts' complex terms and embedded fees make them unlikely to perform as well as expected, said Kent Smetters, a professor of insurance at the University of Pennsylvania's Wharton School.

"These contracts have really high hidden fees," said Smetters, a former Treasury Department economic policy official. "That's why they're terrible ideas for older people, even though they're peddled to them."

Insurers led by Allianz SE and Aviva PLC sold a record $8.7 billion of indexed annuities in the third quarter, up 16% from a year earlier, according to AnnuitySpecs.com, a market research company. The contracts generally earn nothing when stocks fall and include caps on returns that insurers can change at will. Sales representatives are paid commissions of as high as 12%, and some are rewarded with free trips to Disney World. Unlike the fees on mutual funds, those costs are not disclosed.

Indexed annuities are part of a boom in structured products, opaque investments pitched as a way for conservative investors to earn higher yields. As insurance agents sell more complex annuities, stockbrokers across the country are pushing structured certificates of deposit and notes, which are similar derivatives-based investments created by Wall Street banks. Sales of structured notes rose to a record $49.5 billion in 2010, according to data compiled by Bloomberg News.

"The pure psychology of downside protection with upside potential sells really well," Smetters said. "These products are all very complicated. The problem is, they're not transparent."

Salespeople typically downplay the complexity of indexed annuities and their long lock-up periods, said Barbara Roper, director of investor protection at the Consumer Federation of America, a Washington lobbying group. The contracts are "one of the most abusively sold products on the market today," Roper said.

Insurers create the annuities using derivatives, financial contracts whose value is derived from stocks, bonds and commodities. While the policies guarantee principal if held to term, they have withdrawal penalties that may last for more than 10 years. The dividends paid by stocks in the index generally are not counted toward the annuities' returns. Buyers can convert the contracts into a lifetime stream of income at maturity. Most don't, Smetters said.

"You will never get all of the upside" of the stock market because returns are capped, said Eric Thomes, senior vice president of sales at Allianz Life Insurance Co. of North America in Minneapolis, the largest seller in the U.S. "You also don't need to worry about the downside, and with what happened in 2008, this type of benefit will no doubt interest a lot of people."

Low yields on federally insured bank CDs are helping sales of indexed annuities, said Wendy Waugaman, the chief executive of American Equity Investment Life Holding Co. in West Des Moines, Iowa.

"It's really easy to see why they're so popular in today's environment," Waugaman said. Investors also are buying because they're "afraid of market risk," Waugaman said. American Equity is the third-largest seller of indexed annuities, according to AnnuitySpecs in Des Moines, Iowa.

The company is offering agents that sell at least $2.5 million of its products in the 12 months ending June 30 a trip to the Walt Disney World resort in Orlando, Fla. Agents must sell an additional $600,000 of annuities to bring a child. The trip is to American Equity's annual convention, a standard industry practice, Waugaman said.

Insurers who sell indexed annuities buy derivatives from banks to cover the contracts' guarantees, making the business less risky than selling other investments with a guaranteed minimum return. In 2008, insurers lost money on variable annuities with similar guarantees when the stock market plummeted. Hartford Financial Services Group Inc. wrote down the value of a variable-annuity business by $274 million and Prudential Financial Inc. also recorded a loss.

Indexed annuities tend to underperform a lower-risk strategy of rolling over CDs, "because of the high cost embedded in these things," said William Reichenstein, professor of investments at Baylor University in Waco, Texas.

For example, an insurer may take $100 from a customer and invest $94.33 of that in bonds and keep $2, said Reichenstein, who has analyzed several indexed-annuity contracts. With that remaining $3.67, the company buys a portfolio of derivatives linked to the S&P 500 that will give investors some, though not all, of the index's returns.

Even with interest rates near record lows, CDs may still do better than the annuities because insurers will have to reduce caps on returns to maintain profitability, he said.

"They're not playing Santa Claus," Reichenstein said. Insurers must earn enough over time to recoup what they pay up front to agents or brokers who sell the annuities, cutting into returns to investors, he said. Commissions range from 1.5% to 12%, according to AnnuitySpecs.

The opacity of the products' fees and complexity of the return calculations makes it impossible for investors to figure out if they're getting a good deal, said Glenn Daily, a fee-only insurance consultant in New York.

"You're paying the insurance company to set up and manage a portfolio of fixed-income securities and derivatives," he said. "You don't have transparency."

Contracts prevent canceling, or surrendering, for a refund of the account balance without a penalty for a set period that ranges from 3 years to 16 years, AnnuitySpecs data shows. However, most contracts do permit 10% penalty-free withdrawals annually, according to AnnuitySpecs. Owners may incur a 10% charge from the Internal Revenue Service if distributions are made before age 59 and a half because the earnings are tax-deferred.

Siswein bought her indexed annuities from Robert Calamunci of Monmouth, N.J. Calamunci, now an accountant, said he no longer sells the products and declined to comment further. Siswein said she needed financial advice after her husband's death left her with more assets to manage and Calamunci convinced her to put about $250,000 each into four indexed annuities.

One of the indexed annuities Siswein bought, called FlexDex Bonus, was issued by Allianz Life accompanied by a 23-page packet explaining the terms. The contract required Siswein, who was 75, to tie up most of her money until she was 87 or pay withdrawal penalties of as much as 15%. Siswein canceled her policy because of lower returns than she expected and the limited access to her funds, which Siswein says she didn't understand when she bought it.

Earnings were based on a portion of the average monthly performance of the S&P 500 without dividends as calculated from her contract's anniversary on July 14 to the same date the following year. The S&P 500, with dividends reinvested, returned 35% from July 14, 2003, to July 13, 2008, compared with about 15% Siswein made over the same period including the surrender charge, according to Carolyn Walder, the president of Lifetime Wealth Planning and Management in National Harbor, Md., and Alexandria, Va., who now advises Siswein.

"Up until 2008 the market had gone up dramatically," Walder said. "She should have made a lot more money during that time."

Without the surrender charge, an investor like Siswein may have had a total return of nearly 30% for five years, or almost 6% a year, said Laurie Bauer, a spokeswoman for Allianz Life, by e-mail. Bauer said she could not comment on Siswein's contract because Siswein wouldn't sign a release. Holders of indexed-annuity contracts were protected against market drops and lost no principal or previously credited interest, Bauer said.

Siswein said she joined a class action against Allianz originally filed in 2005 alleging misleading sales of indexed annuities. Allianz Life denies the allegations of the case, Bauer said.

Indexed annuities have caps on returns and other terms that insurers may change annually at their discretion. Siswein's contract with Allianz Life, for example, had a cap of 8% on how much she could receive from the S&P's performance in 2003 when she bought it that was lowered to 6% for the policy year beginning July 2008, according to her statements.

Altering the caps allows insurers to change how much they spend on the derivatives that fund the payouts, said FBL Financial Group Inc. of West Des Moines, Iowa, in a Sept. 30 regulatory filing.

"Quite frankly, each and every quarter, we've started taking additional spreads," which helped increase the company's profits, said its chief financial officer James Brannen, during an Aug. 6 conference call with analysts. Brannen referred questions to Kathleen Till Stange, vice president of investor relations, who declined to comment.

MetLife Inc. and Prudential, the two largest U.S. insurers, do not offer indexed annuities. MetLife allows its agents to sell indexed annuities from third parties, Patrick Connor, a spokesman, said.

Meanwhile, TIAA-CREF, the retirement company that manages more than $400 billion, also does not offer them. "Very few people understand what the product is," said Dan Keady, director of financial planning for the company.

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