American National Insurance, an AM Best A-rated company, has come out with a new annuity that may largely solve the conundrum.
Annuities in general have been on a roll since 2022, setting sales records year after year, including in 2024. The party may soon end, however, because the Federal Reserve is widely expected to start cutting interest rates next month. This will negatively impact annuity payout rates, especially for fixed annuities, with a lull. Since there is no telling how much rates will continue to decline as time passes, prospective annuity buyers — especially those conservative-oriented — may lose interest.
But American National Insurance, an AM Best A-rated company, has come out with a new annuity that may largely solve the conundrum, even though it’s partially sidestepping equities more than you might expect from a growth-oriented fixed indexed annuity (FIA). As the name implies, its so-called rate certainty annuity enables customers to lock in a respectable payout rate for the life of the contract guarantee period — highly unusual for the huge majority of other growth FIAs.
Lock in rates for up to 20 years.
Those who purchase the annuity now, before interest rates start declining, can lock in a 4% guaranteed annual return, compounded annually, for this annuity’s 7, 10 or 20-year guarantee period. This is less than payout rates today among many competitors – typically 4.50% to 5% annually. But unlike these companies, American National interest rates won’t decline going forward. “With this product, buyers know exactly what they will receive for the life of the guarantee period,” says a seasoned annuity broker familiar with this offering. “You don’t have to worry about interest rates and hence annuity rates declining, perhaps sharply.”
This is the most compelling aspect of this product, but it’s very different from other annuities in other ways as well. In addition to standard-fare 7 and 10- contracts, American National offers a 20-year contract guarantee period, unheard of elsewhere, exclusively for buyers 50 years of age or younger. (This contract, as well as others, offers its underling options in 12-month slices, and can be combined with multiple options or used to invest in a fresh option annually.)
Better market volatility protection
This rate certain annuity also offers unusually substantial market volatility protection through its equity investments in the S&P 500 Dynamic Intraday TCA index. And for the more aggressive set, it also offers a multitude of so-called trigger investments, marginally offered elsewhere as well.
The 20-year contract stands out because it’s unique. Who would possibly sign up for this? The answer is conservative middle-aged people with an unusually long-term timeframe – and people who are happy to get a solid, if unspectacular return if they don’t want to worry about financial market gyrations for an extended period of time.
The volatility index enables the aforementioned index to move 15% of its investment into cash when times get tough, compared to a five percent cap typically offered by other indexes with a volatility component. And when it’s activated, it moves solely into cash, not cash and bonds, as most other indexes do. This can be a plus because bonds themselves can be volatile, as became blatantly apparent in 2024. The S&P 500 Dynamic index marginally outperformed the traditional S&P 500 index over the last 12 months.
What a “trigger” is about
A trigger investment – again a feature apropos only for aggressive folks – is one in which a very generous return is “triggered” if the index rises to a certain threshold but produces nothing if the threshold is missed.
This is offered in the 20-year contract version, as well as all the others. Investors in this option can sidestep the four percent annual return and instead invest in a trigger option that will produce an annual return of 2% to 6% – 2% if the index is negative and 6% if it’s flat or positive. Another 20-year annual option offers an 8.5% annual index return if the index is at least flat, but nothing if it’s negative.
Still another option here is an enhanced performance trigger. In this one, if the index rises at least five percent, investors pocket 10 percent — but receive nothing if it’s below that.
The 7-year and 10-year investment options are similar, with minor changes. These also offer a guaranteed 4% rate. The aforementioned 2% to 6% annual return in the 20-year investment remains applicable in each of these additional options. In the seven year option, by contrast, those who invest in an index that is at least flat pocket 7.75% instead of 8.50%. And in the enhanced performance trigger, they would pocket 9% instead of 10%. The numbers are marginally higher in the 10 percent option.
Potential negatives
None of this should suggest that American National’s Rate Certainty Annuity doesn’t have potential negatives. For buyers who opt for the guaranteed 4% annual option, the threat exists that they might not keep pace with inflation, reducing their purchasing power. In addition, the fixed nature of the annuity offers less flexibility compared to products with variable features.
The litmus test is really whether this annuity can outpace the plain vanilla fixed annuity, currently yielding as much as 5.60% annually in the 10-year version. This is clearly better than the aforementioned 4% annual rate, although, of course, many investors will probably dabble in different options along the way and could easily pocket more than 5.60% annually.
According to some calculations, American National equity options that generate a positive return in 8 out of 10 years would generate about .75% more over this time span. But if positive returns were generated in only 6 out of 10 years, the fixed annuity would generate almost one percentage point moreover time.
This is a distinct possibility. Not so long ago, in the “Lost Decade” – the 10-year period ended in 2009 — the S&P 500 without dividend reinvestment declined one percentage point.
As always, this annuity is not for everyone- but it’s highly creative, particularly appealing to conservative investors, and definitely worth a look.
