Q&A: What are fixed indexed annuities?

Q. My wife and I attended a presentation the other day by some alleged personal-finance gurus on "fixed indexed annuities," and we left rather confused. I've spent two hours sweeping various Web sites and still feel there's some information that either I haven't found or I've missed. Can you point me at a reference that provides a comprehensive and comprehensible explanation of these instruments?

A. For a reference, you can visit the Financial Industry Regulatory Authority's Web site and search "equity-indexed annuities." But here are the basics: Fixed index annuities, previously called equity-indexed annuities, guarantee a fixed interest rate and then allow you to earn additional interest based on an index's gain (such as the S&P 500). For example, if the index goes up 9 percent and the annuity's participation rate in the index is 70 percent, the index-linked interest rate for your annuity will be 6.3 percent (9% x 70% = 6.3%). So you earn less than if you invested directly in the index itself, but you also lose less when the index drops.

But there are several reasons why we are not big fans of these products. Because there are several different methods of calculating interest, it's very hard to compare products. The commissions on most of these annuities are high, so the insurance company that sponsors them pass on those costs to investors in the form of high fees. And since they're classified as an insurance product, they are subject to fewer regulations than securities and may be sold by people who are not registered brokers.

However, that will change, but not soon. Last Friday the SEC posted a new rule on its Web site that would classify most indexed annuities as securities. Unfortunately, the rule will not take effect until Jan. 12, 2011.