Attractive EIAs draw regulators’ attention

Regulators are taking a harder look at equity-indexed annuities, hot-selling products that offer protection from losses for consumers and big commissions for the people who sell them.

EIAs give buyers the chance to earn higher returns than other fixed annuities because some gains are linked to a stock market index, such as the Standard & Poor’s 500. Sales of EIAs climbed 67 percent to $23.4 billion in 2004, says Advantage Compendium, which tracks index annuities.

The Securities and Exchange Commission may be considering whether EIAs should be treated as securities, rather than insurance products, which would increase regulation. And the NASD is concerned that marketing is too aggressive and may cause buyers to think EIAs are investments.

“Some of the pitches are appalling,” says NASD Vice Chairman Mary Schapiro. The NASD cites marketing claims such as: “Growth potential without market risk!” and “A win/win investment vehicle!”

One reason for the hot pitches: Commissions on EIAs are hefty. They often equal the penalty a consumer would pay for withdrawing the money shortly after buying the annuity — on average, 8.1 percent. Some companies offer 10 percent or more.

“I’ve seen commissions of up to 16 percent,” says John Kawauchi, a vice president at Nationwide Financial, which offers a 5 percent commission on its EIA.

To extend, or not to extend

You’ve checked the ratings, looked at all the options, discussed it carefully and finally chosen a new clothes dryer, DVD player or elliptical trainer.

One more decision to go: the salesperson is offering an extended warranty, or service contract. Should you get it?

Well, maybe. But consumer agencies say, usually, no.

A service contract is a little like gambling. You pay up front so that someone will make repairs for free for the term of the contract. If your appliance needs expensive repairs, you could feel very smart. If it doesn’t, you’ve thrown away your money.

Before you decide, look at the odds.

Household appliances have become quite reliable and many of them are relatively cheap. So your new washing machine (though it may be expensive) probably won’t break. Even if it does break once, it may be repaired for less than the cost of the extended repair contract.

On the other hand, your new DVD player only cost $39.99. When it breaks, you buy a new one, you don’t repair it.

Consumer Reports suggests, however, that you might want to get the service contract for a few things:

• Treadmills and elliptical trainers, because of all their moving parts.

• Plasma TVs, which use fans for cooling

• Laptop computers, because they are delicate, expensive and toted around.

Hold a high balance? Beware

Required minimum payments are about to put a squeeze on credit cardholders who keep high balances. Thank Uncle Sam.

Federal banking regulators recently warned card companies to raise payment requirements to the point where cardholders might actually have a chance of paying them off in a “reasonable” period. Regulators define “reasonable” as seven to 10 years.

The industrywide changes are being gradually rolled out this year, but each credit card company has the discretion to use its own formula. The minimum payments have to include interest, late fees, if any, and a percentage of the principal. Customers, if they haven’t already, will be notified of changes in terms by their companies.

Cardholders who pay off their balances each month won’t have to worry about it. And for the two-thirds of cardholders who carry a balance, the larger minimum payments have the potential to reduce their debt more quickly and take less out of their hides in total interest.

But consumers who juggle cards and run perpetually high balances are going to get pinched, a condition which could be aggravated if they also have variable-rate mortgages or other loans with payments rising with interest rates in the months ahead.

Currently, many cards ask for 2 percent or less of the balance each month, barely enough to cover interest, let alone to make a dent in the principal owed.

A 2 percent minimum payment on a balance of $9,300 — the average household credit card debt at the end of 2004 — is $186.

At that rate, it would take 43 years to pay off a card that charges 16 percent interest.