Annuity FYI Blog

Sophisticated investors sometimes use “collar” strategies to protect their investments. When someone has a collar around a stock, for instance, he or she obtains the right to sell it at a certain price (by buying a “protective put”) and gives someone else the right to buy it at a certain price (by selling a “covered call”). The investor is protected against loss and, until the stock price rises, earns revenue from the call.

A relatively new variable annuity from AXA-Equitable was described to me as employing a collar strategy. The product, which resembles a fixed indexed annuity more than a variable annuity, is called Structured Capital Strategies ADV. It’s not widely distributed right now, but if successful it could lead to similar products from other insurers.

When you buy an SCS contract, you invest your money for one, three or five years in an account whose performance is linked to the performance of either the S&P 500 Price Return Index, the Russell 2000 Price Return Index, the MSC EAFE Price Return Index, a gold price index, an oil price index, or some blend of those.

What makes it a “collar” strategy? SCS limits the amount you can lose while capping the amount you can gain. For instance, if you bought a one-year contract and selected the S&P 500 Price Index as your investment option, you could gain up to 10% over the year (but no more) if the index went up. At the same time, you would be protected against up to 10% in losses during the year. If the S&P 500 Price Index lost 8%, your account would lose nothing. If the index lost 14%, you would lose the difference between 10% and 14%, or 4%.

Bullish investors probably won’t like the 10% ceiling on gains. And bearish investors might object that there’s no clear floor to their possible losses. But this product isn’t for pure bulls or pure bears. It’s intended to give risk-averse people an alternative to staying “on the sidelines” and not investing at all.

Written by Kerry Pechter

The new generation of fixed index annuity products offer excellent guarantees with market downside protection, and they also have lower fees.  Annuity FYI’s article “Fixed Index Annuities Getting a Fresh Look,” says that last year’s sales of $31.4 billion broke sales records for the second year in a row.  Fixed indexed annuity products are very complex and while they are an excellent investment for many people, you definitely need to research the underlying index, the formula which credits interest, the guaranteed minimum return, the participation rate, the spread fee, any cap, bonus possibilities, and the type of indexing method that will be used.

A fixed index annuity is a hybrid of a traditional fixed annuity product.  Investors are guaranteed that they won’t lose any of their original investment because they are guaranteed that their rate of return will always be above zero.  What makes fixed indexed annuities different from fixed rate of return annuities is that the rate of return varies based on a specific equities market.  You will usually have a guaranteed minimum interest rate that can increase based on the performance of the index on which the FIA is based.  FIA’s are an investment somewhere in between a fixed annuity and a variable annuity.  FINRA says that while you will have more risk and more potential return than a fixed annuity, you will have less risk and less potential return than a variable annuity.

The fixed index annuity is worth a look because the newest products have lower fees and better lifetime income guarantees than previous FIAs.  You also get the tax-deferred growth that is so popular with all annuities, shorter surrender periods, walkaway options, choice of an index, and a waiver of annuitization.  The Wharton school found that fixed index annuities have performed better than many alternative investments.  They have been competitive with many of the most popular and safest investments and have even performed better than some variable annuities and mutual funds.  FIA’s are best for investors nearing retirement who want to protect their money, especially after the past couple of market collapses.

According to Karen Hube’s article “Best Annuities” in Barron’s, annuities will take away the worry that many retirees have about outliving their money.  Barron’s has picked 25 of the best annuities to highlight in their article.  As Americans saw half or more of their stock portfolios disappear in the stock market collapse and volatile market of the past 3 years, those with annuities were sitting pretty with little to no worry about how they would live in retirement.  Annuity critics used to say that paying more for protection from down markets and guaranteed payments was not worthwhile, but that opinion is rapidly changing as more advisors recommend annuities to their clients.

Barron’s divided their 25 best annuities into the following 5 categories; the lifetime immediate fixed annuity, the 10-year certain immediate fixed annuity, the deferred fixed annuity with a 5-year guarantee, a capped S & P 500 indexed annuity, and a deferred variable annuity.  See the Barron’s article for the detailed top 25 list.  They used three measures to determine their best annuities.  The returns, costs, and insurance company strength were carefully researched for each deferred and immediate annuity product.  One of the reasons that longevity risk has become so much more worrisome is the increased life expectancy and retirement period for Americans.  An average retirement in 1930 lasted 3-7 years because people only lived to around 60.  Retirements now last for decades, just as traditional pensions rapidly disappear.  Annuities are the product to hedge against that longevity risk.

Some of the past worries about annuities, such as losing the money if you died early, not leaving anything to your heirs, and losing liquidity have been addressed by insurance companies with a number of rider options to give you the investment you desire.  A deferred variable annuity is the most popular of the more than 1,600 different annuity options.  Not everyone thinks that variable annuities are the best choice, some say that an immediate fixed annuity is the safest and purest annuity product.  Regardless which of the best annuities you are interested in, make sure to speak with an expert and look into exactly which product is the best for you and only you.

According to a company press release from Business Wire, “Phoenix Company Releases (a) New Indexed Annuity.”  Their newest annuity product gives investors more options for customizing their retirement products.  The Phoenix Personal Income Annuity is a fixed equity indexed annuity distributed through Saybrus Partners.  It is a single premium annuity with six different indexed accounts as well as a fixed account, protection of your principal, and the choice of adding a guaranteed lifetime withdrawal benefit (GLWB).  A spokesperson from Saybrus Partners said that this new indexed annuity was born from investors looking for more flexibility and customization along with the guaranteed income, principal protection, and potential market gains that come with a fixed equity indexed annuity.

Two different riders are available for the Phoenix Personal Income Annuity.  The “Income Strategy: Today” includes immediate annuities and those delayed up to two years, but is used only for investors looking to take withdrawals within three years.  A 30% bonus is credited to the Benefit Base for immediate annuities, 37 1/2% for those taken after one year, and 45% for those taken after two years.  With the “Income Strategy: Tomorrow” rider, investors looking to keep their money in the fixed equity indexed annuity for three years or more offers a 14% annual credit to the Benefit Base through the first ten years as long as no withdrawals are taken.  The annuity premium, due upon purchase, can be between $15,000 and $1 million.  Both companies are excited to offer investors the stability and flexibility they are looking for now.

Fixed annuity sales increased 6% in the first quarter of this year to a level of $18.9 billion.  The Annuity News Journal article; “Sales of Fixed Annuities are Making a Comeback” by Zachary Dristol, says that sales increased in all four types of annuities.  Book value annuities increased by 12%, moving to $8.6 billion in assets.  Market value adjusted annuities increased by 7% and income based annuities increased by .8%.  While there was only a minimal .2% increase in indexed annuity products, their increases over the past year or so have been so significant that the assets are still very high.

From the fourth quarter of last year to the first quarter of this year, book value annuity assets increased by 42%.  In the same time frame, annuity sales in general increased by 7%.  Beacon Research’s CEO said that increasing annuity rates during the first quarter were likely the reason for the fixed annuity sales increase.  In comparison to fixed and variable annuities, indexed annuity products lost some ground probably just due to seasonal changes.  After the financial crisis of 2008, the annuity industry worked hard to distance itself from AIG and be seen for their guaranteed retirement income again.  The top five annuity sellers in the first quarter were Western National, New York Life, Allianz, American Equity, and Aviva.