Millions of retirees are being duped into buying the latest high-cost, high-commission product served up by the insurance industry--Equity Indexed Annuities (EIAs). According to the Advantage Group, a St. Louis based research-consulting firm, sales of EIAs thru June 2003 totaled $7 billion dollars. I sincerely hope none of that money was yours!

It's those of modest means who seem most susceptible to the EIA sales pitch. The average EIA investor is 58 years old and invests $36,150. Those who are traditional 'CD' savers who are dissatisfied with the low rates available recently are especially targeted.

I don't issue this alert lightly. I am not an alarmist. The reason for my concern is that EIAs are such an 'easy sale' for professional financial salespeople. And unless you are a financial mechanic who can look under the hood to see how they operate, you may not realize the obvious disadvantages.

First, let me explain EIAs. They allow you to participate in the stock market 'good times' while being 'guaranteed' of earning a minimum of 3% during the 'bad times'. In other words, it is supposed to give you the peace of mind of a Certificate of Deposit but the growth of the stock market.

As a result, EIAs are easy to sell. And with commissions as high as 10 or 12% of what you invest, insurance agents and brokers are motivated to recommend them!

Here are the main problems of EIAs: They tie up your money for 7, 10, 12 years or more, limiting your flexibility.

If you need more than just a small portion of your money before then you will have to pay enormous surrender penalties that can be as high as 12%! You can lose principal because of these penalties. EIAs are not regulated by the SEC or the NASD and any 'guarantees' are only backed by the strength of the issuing insurance company.

Most EIAs will put a ceiling on how much you can earn, no matter how much the stock market goes up. But that doesn't mean you can earn the maximum amount because... Many EIAs have an asset fee that is subtracted from the ceiling.

A 2% asset fee is common. With a 10% ceiling and a 2% asset fee, you can never earn greater than 8% in any one year. The insurance company determines the method of calculating the return.

The result is that you lose control and could end up earning far less then the market index. You may not earn the 'guaranteed rate' on the full amount you invest. Some only pay the guaranteed rate on 90% of your original investment and then only if you stay in for the entire 7, 10, or 12 years.

History also tells us that EIAs are not a very good investment. When you run the numbers, there are no ten-year time periods since 1975 where an EIA would have outperformed the S&P 500 index. Plus, you could access your money in an index fund any time you wanted without the automatic surrender penalties imposed by EIAs.

Think about it from the insurance company's point of view. They know that by capping your return at 10% that they can make more than enough in the good years to pay you 3% in a couple of bad years. Plus, they get 2% of each year's return as well!

A 3% minimum appears good today but you will probably feel differently when interest rates go back to 5%, 6% or 7%. If you didn't feel comfortable investing in the stock market when interest rates were 6% then don't invest in the market now. Your ability to sleep at night is more important then the chance of earning a few extra bucks.

So here's the bottom line, in my opinion. If you are looking for income, don't invest in an Equity Indexed Annuity. If you are investing for long-term growth, don't invest in an Equity Indexed Annuity. Quite frankly, I cannot think of anyone who would benefit from owning one.