F&G’s payout rate is a whopping 12.47% – more than the average annual gains of the S&P 500, including dividend reinvestment. Remember that this income payout is guaranteed, so payments continue until death, regardless of whether the annuity’s principal is exhausted.
There Isn’t Always a Catch When You Buy an Annuity from a Top-Rated Insurer. Pacific Life offers a fixed indexed annuity (FIA) with an attractive and rare surrender period of only five years and another FIA that offers more generous terms
in an otherwise standard product with a typical 10-year surrender period.
Consider Some Novel FIAs That May Fit Your Bill in Highly Uncertain 2019
By Steve Kaufman
So we’re in a new year and after months of procrastination you’ve decided to take the plunge and purchase an annuity. But which type – or, more precisely, which one exactly? Never an easy decision, it’s tougher than usual this year – unless you’re thoroughly conservative – because of significant uncertainty regarding the outlook for the U.S. economy and hence the stock market.
Will the Federal Reserve overdo it and raise interest rates too much, triggering a substantial economic slowdown? Will the trade war between the U.S. and China continue unabated and inflict growing economic damage on both countries? Will economic growth in Europe and Japan continue at a snail’s pace and significantly curb U.S. exports to those markets?
And regardless of the outcome of the U.S. – China trade war, what about the global implications of festering economic growth in China – the world’s second-biggest economy?
The most conservative annuity buyers opt for plain-vanilla fixed annuities, and this is hardly an unwise move. A six-year fixed annuity is now paying 4.1%, far above what a bank CD pays and, for that matter, materially higher than the yield on the benchmark 10-year U.S. Treasury bond. Many investors, however, prefer to beat this by a percentage point or two and typically look to a fixed indexed annuity (FIA) to do so because it offers an enticing lure – stock market exposure with no losses in a down market.
There is a downside, of course. While you lose no money in a down market, you also earn nothing – far worse than pocketing a respectable return from a fixed annuity.
What to do? Consider all your options, which today are broader than ever.
You could go with a good, conventional FIA and not worry about what the market will do in 2019, knowing that this is a long-term investment and so it doesn’t much matter if the stock market falters. For that matter, it’s probably OK even should it decline in 2020 as well. You can also opt for a FIA that allows you to combine stock market exposure with a fixed-rate, no-risk supplement- — and for no fee.
If you’re really bearish, you can also take a page from options traders and invest in a newish type of FIA that will reward you for betting on a down market.
Here is a description of annuities that fit these options:
Invest in a conventional FIA that offers an unusually generous participation rate on the S&P 500 index (54%) without a cap and without any fees. The minimum investment is only $5,000. These days, some people prefer to invest instead in a so-called low-volatility FIA, which invests in bonds and commodities as well as stocks, typically lowering returns but also generally providing more stable performance.
These FIAs are relatively complicated, however, and most annuity buyers prefer simplicity. “It’s harder to track multiple indexes, and most people prefer the plain-Jane S&P 500,” says a financial advisor abreast of the annuity world. “This particular FIA is simpler and offers more growth potential. And, best of all, it boasts the best S&P 500 participation rate on the market.”
Invest in a largely conventional FIA that offers a respectable S&P 500 participation rate of 42% as well as the opportunity to put a chunk of your investment in a fixed rate bucket paying 3% a year for no fee, enabling you to hedge your bet on the stock market.
This annuity, which has a minimum requirement of $10,000, has a relatively short seven-year surrender schedule. If you think there is still a chance you might want to bow out sooner, you can do so without penalty by paying a fee of less than half a percentage point a year.
Take a flyer and buy a FIA that rewards you in a bad market. For a minimum investment of $100,000, one product will pay you 8.7% in a year in which the S&P 500 stays flat or declines even marginally. This is known as an inverse performance trigger (IPT). “This product is for those who think we’re heading into another financial crisis,” says the financial advisor.
This is another case in which folks can invest in this annuity and also place some of their money on a more conventional track, such as pocketing 50% of the increase of the S&P 500, without a cap. This would help offset the fact that investors in this product receive nothing if the market rises.
Those who don’t want to invest $100,000 in this product can instead invest as little as $5,000 in exchange for a lower 8.1% return in a down market and a 45% S&P 500 participation rate on the supplemental, more conventional option.
Make a roughly similar bet on another FIA offering an IPT that will give investors a return of up to 11% if the S&P 500 falls as much as 12 ¼ %. (The difference reflects a required annual fee of 1 ¼ %.) The more the market drops, the more the annuity owner receives, until reaching the cap.
A substantial caveat regarding this FIA is that an increase in the S&P 500 requires debiting your account value. This is a sharp contrast to most FIAs, which do not penalize owners in a down market.
“This annuity is only for people who want to bet that the market will take a huge hit this year,” the financial advisor says. “They have to be very, very confident that they will turn out to be right.”
The minimum investment in this FIA is $10,000.
As always, the best path forward for any investor is ultimately his or her decision. It boils down to your risk orientation and your sense of how the U.S. economy will perform in 2019. Just bear in mind that things can change on a dime along the way — and that ultimately nobody knows how the stock market will do this year.
The Athene Ascent Accumulator 10 is a Fixed Indexed Annuity with a wide variety of index crediting strategies and exclusive indices providing strong growth potential.
Update* Since this product alert video was filmed, the BNP Paribas participation rate went from 170% to 185%!
Watch Somerset Wealth Strategies CEO Tom Hamlin make the case for the highly recommended Athene Ascent Accumulator 10.
Product Alert: Pacific Life Index Edge 10
The Pacific Life Index Edge 10 is a Fixed Indexed Annuity with a very high performing S&P 500 Strategy with no market risk and very low credit risk.
Watch Somerset Wealth Strategies CEO Tom Hamlin explain the benefits of the Pacific Life Index Edge 10 in this Annuity FYI Video Product Alert.
A Boost in the Roll-Up Rate Makes This FIA More Generous Than the Competition
By Steve Kaufman
As Annuity FYI has noted time and again, you need to do your homework before you buy an annuity. Even annuities in the same category, such as popular fixed income annuities (FIAs), typically differ in significant ways and in their withdrawal rates if you purchase a lifetime income guarantee.
Choosing the FIA with the best lifetime withdrawal guarantee isn’t nearly as simple as choosing the one with the highest advertised withdrawal rate.
A case in point is an established FIA that has just increased its so-called roll-up rate to 7.5%, up from 7%. This is the key reason it is probably the top income-paying FIA in the business. (The interest is compounded, which makes this rate even more valuable.) In terms of what an annuity owner ultimately collects, the roll-up rate is often as important as the withdrawal rate.
If you are interested in this product, please call 1-866-223-2121 or complete the form below.
In the case of this FIA, a single 65-year-old man who doesn’t withdraw funds for a few years from the annuity would benefit from both the higher roll-up rate and a competitive 5.5% withdrawal rate. Other FIAs match the withdrawal rate, but not the roll-up rate.
The latter raises the annuity’s income base — the number used to calculate your guaranteed annual income. It does so by adding a specific percentage for each year you don’t withdraw money from the contract. The roll-up works much like Social Security – once you qualify for benefits at age 62, the longer you wait to collect them, the more you get (until age 70).
Here is another way to look at this: What really counts in an annuity with an income rider is the amount of your guaranteed minimum income in retirement. If annuity A grows faster than annuity B during your savings years, due to a higher roll-up rate, it could pay more out when you retire – even if annuity B has the higher withdrawal rate.
It isn’t uncommon for a FIA to change its roll-up rate or withdrawal rate – or to alter other terms, for that matter. What is common, however, is that FIAs periodically increase one rate and trim the other, leaving no net benefit for many new purchasers. In the case of the FIA we are spotlighting, this isn’t happening – and that’s why it’s so appealing.
Will other FIAs follow suit?
Unfortunately, this is unclear. You might think they would be improving their terms because interest rates have been steadily rising, and, in fact, most plain vanilla fixed annuities have been increasing rates. FIAs are more complicated, however. For example, they participate in the stock market by purchasing index options, and these have been increasing in price in tandem with unusually sharp market volatility. If this continues, it drains the use of funds for other purposes.
Roll-ups are common in variable annuities, as well as FIAs. If you opt for one of these with an income rider, it would obviously be wiser to buy one a bit earlier in life – say in your late 50s – boosting your withdrawals down the road by parking money in the annuity longer. Unfortunately, research has shown that many annuity contract owners make relatively little use of roll-ups.
Also important to note is that many people seem to believe that the roll-up in the income base is the same as the appreciation of the account value of the annuity. It is not. The roll-up has no effect on account value, which is the actual market value of the annuity’s underlying assets. The roll-up rate is solely about fattening the income base.
New FIA is Offering a 70% Index Participation Rate
By Steve Kaufman
If you’re attracted to annuities and, unlike many, favor growth over income, a new fixed indexed annuity (FIA) – and one with only a seven-year surrender schedule – may be right up your alley.
This FIA offers a 70% participation rate on the S&P 500 – at least 20 basis points higher than most and the most generous offering in the market. There is a catch – it comes with a 2% spread. So if the market in a given year rises, say, 10%, you would get credited as though it rose 8%. Still, this product will always beat the competition if the S&P 500 market rises at least 10%.
Prospective buyers have to decide if they’re fundamentally bullish about the stock market going forward, especially since this FIA’s lifetime income rider option isn’t particularly attractive.
“Most FIAs are good for growth or good for income, but not both,” says one wealth management expert familiar with the product. “So you have to decide which approach you prefer.”
The minimum investment for this FIA — whose insurance company issuer is rated A+ by A.M. Best — is $25,000. The seven-year surrender schedule means that owners of this FIA can liquidate their investment years earlier than most FIAs without penalty.
What most investors probably want to weigh, of course, are the odds that the S&P 500 will rise at least 10% annually without dividends. Relatively recent history suggests that the odds are strong. The S&P 500 rose more than 10% ten times in the last twenty years. Six times, the return was negative, which means that this FIA – like all FIAs – would have beaten the market, if not other FIAs, because FIAs don’t penalize investors when there are losses.
The flip side is that a number of market pros believe that the nearly 10-year-old bull market will face a correction or worse sooner than later and also that market returns will be below par over the next 10 years. This is primarily because the market is pricey and because the strong U.S. economy is widely expected to slow back down to a modest 2% annual growth rate in coming years, undermining profit growth potential. As it is, S&P 500 companies just reported unusually robust quarterly earnings growth and yet the market rose only modestly.
One counter argument, predictably, is that market pros commonly get the direction of the market wrong. In addition, the cost of buying this FIA and betting wrong on the strength of an up market in a particular year is not high. If the S&P 500 rose, for example, 6%, and you were in a plain-vanilla FIA, you might pocket a 3% gain. With this product, you would instead receive 2.2% — a modest shortfall of $800 on a $100,000 investment.
Those who prefer guaranteed income over growth might want to consider buying a traditional fixed annuity instead of a standard FIA because interest rate payouts have risen roughly half a percentage point in the past year. In addition, they typically have shorter surrender schedules.
A New FIA with Good Options – Especially Attractive to 80-Plus-Year-Old Investors
By Steve Kaufman
Say you are in your early-to-mid-80s and want to invest in one of a number of popular fixed indexed annuities (FIAs) so that you have exposure to stocks — and hence a shot at beating guaranteed fixed rate returns.
For the most part, it’s not going to happen. Most FIAs are not sold to folks over 80 for fear that they will not live a lot longer, forcing the sponsoring insurance company to return the principal to a beneficiary. Most insurance companies much prefer to keep the money in-house, make the guaranteed payments and invest elsewhere.
At least one insurance company is bucking the trend, however, and selling a FIA with different investment options, including liberal exposure to foreign markets. People can buy the FIA until age 90. There is no guaranteed income rider – but also no fees – and in any case, if historical returns are any indication, investors who sign on to the annuity’s global multi index strategy are likely to beat typical guaranteed returns most years.
As is the case with all FIAs, investors lose no money in down markets.
“This product is perfect for somebody who is 85 or even older, in good health and looking to beat fixed interest rates with downside market protection,” says a wealth management advisor familiar with the product.
What makes this FIA particularly interesting is the global multi index option, which is not common and offers more diversity than competitive offerings. In the version of the annuity with a five-year surrender period, you invest in the S&P 500 with a 60% participation rate, the Euro Stoxx 50 index with a 30% participation rate and the Hong Kong-based Hang Seng index with a participation rate of 20%.
(The Hang Seng index consists of 48 of the largest companies listed on the Hong Kong stock exchange.)
Over the past 20 years, this strategy substantially beat most FIA indexes that invest solely in the S&P 500.
This annuity is available with a five, seven and 10-year surrender period. As the surrender period rises, the participation rate in the S&P 500 climbs from 60% to 65% to 70%.
Less venturesome investors also have the option of investing solely in the S&P 500, starting with a 6% cap, or in a guaranteed fixed rate starting at 2.35%.
Investors can withdraw 10% of their principal penalty-free annually and also make withdrawals without penalty for nursing home or confined care needs.
This Fixed Annuity Pays a Whopping Interest Rate of 4.10%
By Steve Kaufman
Mergers and acquisitions can shake up markets — even the staid annuity industry – and, in one case, it is directly benefitting consumers.
Starting July 1, an insurance company is offering a seven-year fixed annuity – specifically, a Multi-Year Guaranteed Annuity (MYGA) – for the unusually high rate of 4.10%. Most seven-year MYGAs pay no more than 3.70%. Even 10-year MYGAs pay less than this.
“This offer is quite amazing,” says a principal in an annuity marketing distribution frim who sees lots of new annuities every day.
As it turns out, Global Bankers Insurance Group, a family of life insurance and reinsurance companies, acquired this insurance company roughly a year ago and wants to make more noise in the market. “Right now, this company is essentially buying business”, says the aforementioned principal.
While this is an outstanding rate, annuity shoppers should also be happy that rates in general are rising alongside multiple hikes in Federal Reserve interest rates. Because of rising global trade war friction, people are looking for a flight to financial safety, and fixed annuities certainly fit that bill. Nonetheless, experts say that rates on fixed annuities overall have risen about 1 percentage point since the start of 2016.
Increases have been especially sharp at the short end of the maturity scale. Three-year MYGAs, for example, are typically paying 2.25% to 3%, more than double the rate of 1% to 1.25% at the start of 2016. Also, up sharply are five-year fixed annuities, now typically paying 3.25% to 3.8%, up from about 2.50% from two-and-a-half years ago.
Rates on longer-term fixed annuities are not up as much, but are still up. Seven- and 10-year fixed annuities are typically pay 3.50% to 4.10% today, up from just under 3% in the recent past.
Some potential investors might be tempted to wait for rates to rise still further, which is likely, but that would mean much leaner returns on conservative investments in the interim. Also, while the Federal Reserve is expected to raise interest rates further, that strategy could be curtailed if the mounting global trade war begins punishing economic vitality, some economists say.
Investors of this annuity can take 10% penalty-free withdrawals, starting in the second year of ownership. Policy owners may also withdraw up to 50% of their accumulated value without a withdrawal charge if confined to a nursing or residential care facility.
Out of the Blue, a New FIA Pays Dividends
By Steve Kaufman
In the world of popular fixed indexed annuities (FIAs) — which combine a guaranteed rate of return with stock market participation and don’t lose money in a down market, one word – dividends – is always left unsaid. These steady premiums add up over time, but they never wind up in FIAs because FIAs are pegged to indexes, such as the S&P 500, and almost all indexes exclude dividends.
At least this has been the case until now.
A new 10-year FIA is pegged to the Total Return S&P 500 Total Return Index which, unlike the S&P 500, automatically incorporates dividends. This FIA also offers guaranteed lifetime income – for free – a home health care “doubler” for those who develop disabling conditions and, for interested investors, the opportunity to get your premium back after five years.
While this product is attractive and highly creative by the standards of annuities, it isn’t nirvana. The free income rider, for example, pays substantially less than most riders that charge a fee. And while you can get your premium back after five years – a nice touch amid today’s rising interest rates and widespread turbulence – all investment returns are sacrificed.
Nonetheless, this FIA makes sense for annuity owners who like the long-term appeal of the stock market but don’t want to lose money in a bad year, and mostly don’t care about a guaranteed income stream. That’s because they believe market appreciation will outperform the stream over time, even if it is more generous.
The minimum investment required to purchase this FIA, which is popular, is $20,000.
This product arrives at a propitious time. The stock market isn’t faring well, interest rates are climbing but still very low and uncertainty permeates almost everything, whether it be fear of an overly aggressive Federal Reserve, the possibility of a global trade war, upcoming denuclearization talks between the U.S. and North Korea, or domestic politics.
As a result, more investors than usual today are queasy about buying an annuity, putting more money in the stock market or in investing in bond funds, knowing that climbing rates savage bond prices. You could park your money longer than usual in a money market fund, but it doesn’t pay much amid low rates.
What is the best course for investors today? Fact is, given all the uncertainty, nobody knows. And so, say financial planners familiar with this FIA, why not place a bet on U.S stocks – strong performers, over time – and include the financial bang that dividends deliver?
“This FIA is designed for growth, plain and simple”, says one advisor familiar with the product. Should this gambit not turn out well, investors have the option to get their principal back after five years and make a different bet.
No FIA pays 100% of the upside performance of its underlying index. It needs to hold back in the event of down markets when it absorbs the red ink without penalizing investors. This particular FIA pays 50% of what the S&P Total Market Index does – a typical slice of the pie. Nonetheless, its performance potential is much higher than other FIAs.
In the 10-year period ended in March, for example, the average annual return of the S&P 500 was 7.16%. If this FIA had existed during this period, it would have beaten that, returning 7.59% even though investors received only half of the action. Bolstering its return would have been its ability to sidestep market activity in 2008, the start of the Great Recession when the S&P 500 plummeted 37%.
Those who invested in the S&P 500 Total Index on their own and stayed the course would have fared better, pocketing an average return of 10.4%. But these investors had to have nerves of steel. Most do not.
Two Five-Year MYGAs are Paying Well Above the Going Market Rate
By Steve Kaufman
If you’re wondering when you will finally benefit from a series of Federal Reserve interest rate hikes and more to come, you can take a breather. Two insurance companies have just rolled out five-year fixed annuities paying 3.6% — the best rate in the industry by a substantial margin.
Five year fixed annuities – specifically Multi-Year Guaranteed Annuities, or MYGAs – are the most popular because longer contracts offer only a marginally better deal. And these two standout MYGAs are paying 40 to 60 basis points more than most of their competitors.
To put this deal in additional perspective, five-year certificates of deposit top out at 3% at a small handful of credit unions and at 2.66% at banks, according to Bankrate.com. (The national average for 5-year CDs is only 1.04%.) And the benchmark 10-year U.S. Treasury note, which obviously ties up money twice as long, is yielding only 2.85%.
One annuity expert says these deals just became available because climbing market rates give aggressive insurance companies more leeway to offer consumers a better deal and still make a profit. They grab market share by being more generous. Still, he doesn’t see other insurance companies matching these rates in coming months, although he does think competitors will move somewhat and increase five-year MYGA rates up to 3.4%.
“Folks interested in purchasing a safe, fixed investment should take a good look at these 3.6% MYGAs now,” he says. “You can’t beat these rates, and I don’t think they will be available for long.”
Although both products have steep surrender charges for premature withdrawals, starting at 9% in the first year, one offers annual penalty-free withdrawals of 10% and the other penalty-free withdrawals of earned interest. The minimum investment for one is $10,000 and for the other $20,000.
In a rising interest rate environment, some financial advisors think that building a ladder of fixed annuities with different maturities is best because this increases the odds that at least one annuity will expire when rates are higher. Then investors can take their proceeds and buy a new annuity paying a higher rate.
Because of the unusually high market premium these 3.6% MYGAs are paying, however, they probably don’t need to be part of a ladder. Rates on MYGAs and other fixed investments tend to rise very slowly, even in a rising rate environment. Even though the Federal Reserve began hiking interest rates at the end of 2015, five-year MYGA rates, in general, have remained roughly 3% for years.
If Looking at a FIA with a “Hybrid” Index, Make Sure You Know What You Are Buying
By Steve Kaufman
Popular fixed indexed annuities (FIAs) have been changing in a subtle but significant way, and this trend should prod prospective buyers to become more conscientious shoppers. They should make a point of recognizing the trend, poking into it, and weighing the pros and cons before sealing a particular deal.
Some investors are likely to decide to stick with traditional FIAs, given the historical track record of stocks as the best-performing long-term financial investment and the widespread belief that today’s bull market remains intact.
A growing array of FIAs are being linked to so-called “hybrid” indexes. These follow tactical weighting schemes, typically encompassing bonds, futures and commodities in addition to stocks, and are driven by defined algorithms. Many are also called low volatility indexes.
On the plus side, these FIAs offer substantially higher participation rates than traditional FIAs, which typically invest in the S&P 500 index, and usually have a volatility-control overlay mechanism. On the negative side, they can be confusing. In addition, volatility control mechanisms sound good but may be a Catch 22. They are essentially a form of market timing, which at best has had mixed success in the investment world. Most important, FIAs linked to hybrid indexes may fare less well over time.
Insurance companies have been rolling out FIAs with hybrid indices as a way to differentiate themselves from the competition. There are more than 50 such FIAs today, compared to only six in 2013. Among the newer hybrid indexes are Pimco Global Optima Index, the S&P 500 Multi-Asset Risk Control 5% Excess Return Index, and the BNP Paribas Momentum Multi-Asset 5 Index.
Most hybrid indices used by FIAs are relatively new and so do not have extensive track records. Investment companies try to get around this through so-called back-testing – i.e., creating a computer model that attempts to quantify how the index would have performed in the past if it actually existed. While hypothetically useful, some investment pros caution that past results are not an indicator of future results. They add that back-testing is sometimes compromised by bias in the process or by dependence upon correlations that cease to exist.
This doesn’t mean that FIAs with hybrid indices should be avoided. They are almost always more conservative than traditional FIAs, which fits the bill for some investors, and they aren’t correlated with the stock market. This is typically a good thing for investors who have substantial stock market exposure elsewhere in their portfolio.
But when a discussion arises about the possible purchase of such an annuity, prospective investors are well–advised to make a point of analyzing the index in concert with your broker. Understand what you’re thinking about buying – and make sure you like it better than a traditional stock-focused FIA.
New FIA Stands Out
By Steve Kaufman
A new fixed indexed annuity (FIA) offered by an established annuity player has begun attracting attention for all the right reasons. It offers a 50% participation rate on the S&P 500 index — more than 10% more generous than most competitors – and a much-shorter-than-average surrender period of only seven years.
The insurance company selling this annuity, which tends to offer better-than-average deals, also allows investors to contribute additional premiums to the FIA for the lifespan of the investment — and without a reset in the surrender period. Most other FIAs do not allow follow-on investments. If they do, the surrender period is reset.
In a way, this FIA, sold in all states except New York, is a positive flagship for FIAs in general.
Overall, index participation rates have been rising in the past year, although not as aggressively as the case with this product. Most FIAs today are offering participation rates of 35% to 45%, up from 30% to 40% a year ago. On the other hand, rollup and payout rates have mostly been stagnant. Some annuity industry watchers say they may not rise much in the future, either, regardless of interest rate trends, because of rising state reserve requirements.
This FIA offers other goodies as well. For those who opt for the lifetime income rider, most impressive is the income base rollup rate. In addition to receiving a guaranteed annual step-up of 4% annually, investors get credited for good investment performance – a 50% increase in the attendant index. If, for instance, the S&P 500 rises 15% over the past year, investors in the rollup phase would receive a total of 11.5%, not merely 4%.
(Post-rollup rates are about average. A 60-year-old single man would receive 4.5%, a 65-year-old 5%, a 70-year-old 5.5% and a 75-year-old 6%. As is standard industry practice, investors can withdraw 10%-a-year penalty-free.)
Investors in this FIA have multiple options. If they prefer, they can get a 100% participation rate in the S&P 500 with a 5.6% annual cap. In addition, they can invest in a total of seven index options. Another attractive deal, for example, would be an investment in Deutsche Bank Croci Sectors III, an international index that invests mostly in stocks and bonds in the U.S., European and Asian markets. This offers 100% participation, minus a 1.85 percentage point spread.
This FIA offers a return-of-premium feature as well. For an additional 40 basis points annually, investors can exit the annuity at any point in the contract and receive no less than their initial premium.
The minimum initial investment is $10,000 in qualified and non-qualified accounts.
What to do as Interest Rates Continue to Tread Water: Consider a MYGA Paying 3.1%
Conservative investors find themselves in a predicament that just won’t quit. They are wedded to low-risk fixed rate investments, but interest rates are extremely low and pretty much don’t budge. This year, the yield on the benchmark 10-year U.S. Treasury note has been stuck between 2.01% and 2.63% (it’s now roughly in the middle of the range) – a measly 62 basis points.
Change isn’t expected anytime soon. Economists believe the 10-year Treasury note will end the year paying about 2.5% The stock market, meanwhile, has just posted its longest streak of highs in 20 years, and, believe it or not, is likely to keep rising. But, alas, equities are generally off the table for the conservative set. These folks may derive some satisfaction if the stock market temporarily corrects at some point, a likely proposition, but that would still essentially leave them in an unenviable spot.
What can be done about it?
The answer is to seriously weigh the prospect of buying a Multi-Year Guaranteed Annuity (MYGA), preferably a five-year MYGA, and one that offers a guaranteed payout of 3.1%. This is markedly higher than the 10-year Treasury note yield — and likely to stay that way.
This particular annuity, incidentally, allows owners to withdraw the interest they earn annually – unusual for annuities offering above-market payouts. (Most five-year MYGAs today pay 2.75 %.)
Some people have refrained from buying MYGAs because they think that interest rates will rise more than they have. When that happens, they believe, annuity vendors will be forced to go with the flow and broadly hike their payout rates as well. They want to purchase annuities when that occurs, not before.
This is a bad bet, however. Despite some concerns about rising prices late last year, the Consumer Price Index posted five straight months of decelerating inflation through July. Inflation did perk up in August, but mostly because of a temporary weather-induced increase in gasoline prices, and over the past 12 months, consumer prices have still risen less than 2% – the rate preferred by the Federal Reserve.
One strong reason that inflation is unlikely to rise much is that wage increases in the U.S. and the rest of the world, remain very modest despite substantial hiring.
Most economists don’t expect this to change. Wage increases are the primary driver of inflation.
Inflation could nonetheless increase, of course, if there is an unexpected inflationary shock of some sort. Investors who want protection from this possibility should buy a ladder of MYGAs, maturing in, say, three, five and seven years, maximizing the odds that one or two would mature after inflation and rates unexpectedly rise. This would enable the repurchase a new MYGA or MYGAs paying a higher interest rate. Most three-year MYGAs now pay 2.1% and seven-year MYGAs 3% and offer penalty-free access to some cash along the way.
The good part about being a conservative investor is that you fundamentally face no risk. The bad part is that your returns sometimes are barely better than the inflation rate. MYGAs appear to be the solution –more so now than ever.
Care about the Death Benefit? Check out these Annuities.
Most annuities have a death benefit, but it’s fair to say this feature usually ranks low on the totem pole in terms of investor priorities. That’s why most people don’t pay more for an enhanced death benefit, and it’s why annuity owners who live into their 80s typically wind up leaving beneficiaries very little, having exhausted the cash value of their account.
Not all annuity owners follow this path, however, especially if they have serious health issues or are wealthy. For them, there are two annuities on the market – one a fixed indexed annuity (FIA) and the other a variable annuity (VA) – that place a much higher priority than others on not only maintaining the death benefit but increasing it, thereby leaving fond memories of them in the hearts of their beneficiaries.
If you are interested in these products, please call 1-866-223-2121 or complete the form below.
The former, a conservative annuity, focuses almost solely on enhancing the death benefit. The latter, which is more aggressive, has the same goal but also expects the owner to take some money off the table in the form of payouts. Which is best for you depends on your personal preferences, as well as your need for income. Both are available for minimum investments not exceeding $10,000, regardless of whether it is in a qualified or non-qualified account.
The FIA increases the death benefit 7% annually, a feature costing 0.95% a year, roughly the price of most guaranteed lifetime income riders. But virtually nobody who buys this annuity buys an income rider – payouts would undermine the goal of maximizing the death benefit. “People are swapping a better death benefit for income,” says one financial adviser familiar with this product. “They don’t plan on using the money themselves.”
Other FIAs and other annuities have enhanced death benefits that work largely the same way, but the death benefit typically grows only 4% a year. The fee is only about half as much. In the case of the aforementioned FIA, however, this is largely a moot point – it makes little difference what the fee is if the death benefit is all that matters.
In the other annuity – the VA — the death benefit also rises, not decreases, after you buy the product. The enhanced benefit costs 1.3% annually, which is not bad in a rising market, as we have today. This VA offers unusual flexibility in how the money is invested. And owners can take withdrawals and not undermine the death benefit, as long as they don’t exhaust the cash value of the account.
The value of this annuity rises 6% a year or by the amount the market index rises, whichever is higher. It makes the most sense for those who want flexibility in how much of the money goes to the annuity owner and how much to the beneficiary. Buyers, of course, also must have faith in the ability of the stock market to continue to rise at a relatively good clip over time.
Regardless of which annuity you choose, both annuities guarantee that you will get at least 100% of the original cash value of the annuity, assuming you play by the rules. Annuity beneficiaries also escape burdensome probate. Both often beat life insurance as well because no health screening is required. Those with significant health problems either cannot get life insurance or must pay too much.
If you are interested in these products, please call 1-866-223-2121 or complete the form below.
Here is a MYGA to Help Combat Stubbornly Low Interest Rates
Despite three increases in short-term interest rates by the Federal Reserve since the end of 2015, the rates that consumers receive in savings accounts and on CDs and annuities have pretty much refused to budge, at least in aggregate.
Yes, inflation is very low and so you’re not losing much in the way of purchasing power. But you’re not getting ahead, either, and in fact, you are falling a bit behind even though prices are rising only about 1 ½% a year. If rates you receive rose about the same, you might roughly be even – but that, unfortunately, isn’t the case.
What to do?
Consider a seven-year Multi-Year Guaranteed Annuity (MYGA) recently rolled out by a 92-year-old insurance company that is paying 4.25% the first year and 3.25 % annually over the following six years. With the exception of a 10-year MYGA offered by the same company paying 3.5% annually, this is the highest MYGA interest rate out there.
Roughly competitive products are paying only 3% or 3.25% over multiple years. The difference between this product and the others is not gargantuan, but it’s better nonetheless.
Also note that this MYGA, unlike others, doesn’t offer penalty-free withdrawals, typically up to 10% annually, along the way. So folks who buy this product have to stick with it or pay surrender fees that start at 9% the first year and only slowly decline thereafter.
This lack of liquidity fattens the insurance company’s profit margins and enables it to offer this particular product and still turn a profit on the proceeds by investing elsewhere.
The minimum investment for this MYGA is $5,000 in a qualified or non-qualified account. If you ultimately decide to buy this product, you should buy it as part of a ladder of MYGAs to manage interest rate risk. It’s best that each MYGA mature in a different year to maximize the odds that at least one matures after interest rates have risen, enabling you to purchase a comparable MYGA paying a higher rate. Other relatively attractive MYGAs mostly have a five- or six-year maturity.
“It doesn’t make sense to put all your money in one product that matures on one specific date,” says one wealth management expert. “The idea is to curb interest rate risk.”
If interested, bear in mind this MYGA is not available in every state. So those who think this product may be right for them should contact an advisor at Annuity FYI by calling 866-223-2121 or completing the short form below.
New FIA Offers Maximum Liquidity
Let’s say you’re interested in purchasing a fixed indexed annuity (FIA) but your priorities are different from most folks who do. By the standards of an annuity, you want maximum liquidity. And you’re not interested in a lifetime income rider.
The guaranteed income is nice, to be sure, but who needs those pesky fees, about 1% a year?
On the other hand, you do care about capital appreciation, and so it would be nice to find an FIA with truly good upside potential.
If this description more or less fits you, you might be interested in an FIA introduced this month fitting these parameters.
Here is why:
This FIA has a seven-year surrender schedule, compared to 10 to 12 years among competitors. (It also offers a penalty-free return of capital after four years, without accrued interest.)
It offers more generous penalty-free withdrawals. Like other FIAs, it offers 10% annual penalty-free withdrawals. But if you don’t make a withdrawal one year, you can withdraw up to 20% penalty-free the next. This makes it unusually easy to stay the course for the duration.
One index in which it invests is the BNP MAD 5 index, a low volatility, rules-based index comprised of three equity futures indices, three bond futures indices and two commodity indices. Annuity owners receive 110% of the performance of the index. This is not particularly unusual, but the historical performance of the index is – its average annual return over the past five years was 7.56%, handily beating most of its competitors.
Another investment option is the tried-and-true S&P 500 index. This option pays 100% of the performance of the index, with a cap of 4.25%, higher than most competitors.
These features are not free but are reasonably priced – 95 basis points a year, about the price of a lifetime income rider.
As an added perk, investors get a 5% premium bonus on the day of purchase, added to the cash value of the account.
It is true that many investors in this FIA will probably wind up paying for more features than they actually use. One annuity marketing expert, for example, concedes that only about 30% of buyers will execute the seven-year surrender schedule. Most people don’t bolt from annuities prematurely, he says. “And with the ability to withdraw 20% of your principal every other year, there is even less need to surrender the annuity,” he says.
Who is this annuity best for? “Some people just don’t want to lock up their money more than have to,” this pro says. “This is a product that offers plenty of liquidity, as well as very good growth potential.
Five Top FIA Pace Setters
We have just updated our list of what we deem to be the five best fixed indexed annuities (FIAs) among hundreds – both income- and growth-oriented. Their strength is heartening. If all FIAs were this good, the robust period of outstanding FIA sales overall in recent years would quickly return.
This may not happen anytime soon, but these five FIAs can handle your investment needs quite nicely.
If you think you’re interested in an FIA – an annuity that invests in market indexes and returns a piece of the action in a good year and doesn’t lose value in a bad year – check these out. Most FIAs also offer lifetime guaranteed income riders. To eliminate different details about potential annuity buyers that impact annuity terms, such as age and marital status, the basis for all income assumptions is a 60-year-old male who lives in Florida and, if applicable, is deferring income in his first five years after purchase.
Here are our top picks:
Athene Ascent 10 Bonus 2.0. This FIA has been built specifically to maximize guaranteed income. It offers a 10% bonus on the benefit base, as well as a 10% annual rollup for 10 years. If our hypothetical Florida investor invested $250,000 in this product and deferred withdrawals for five years, he would receive $18,500 annually – materially more than many competing products.
Security Benefit Secure Income Annuity. This FYI pays an upfront bonus of 8% in most states. as well as a 6.5% compounding rollup for up to 10 years. Withdrawal rates also increase each year. In most states, the Security Benefit product also offers a home healthcare double for folks whose mobility is undermined by serious health issues.
North American Company PrimePath 12. This FIA takes the unusual step of doubling its index participation rate during the pre-withdrawal rollup period. – providing a truly good shot at a strong long-term return for those who let their investment bake before taking withdrawals. In one of two versions of this FIA, the doubling of the participation rate allows investors to track the market dollar-for-dollar for up to 15 years.
On top of this, this FIA’s 3%-a-year income rider charges no fees. A home healthcare doubler is also offered in most states.
Guggenheim Highlander. This FIA offers a 4% bonus and invests in the S&P 500. It offers a generous 4 ½ % cap on the S&P 500 index, or, if investors prefer, a 40% participation rate with no cap. A lifetime income rider is not recommended. There are no fees. Another advantage is pure simplicity: This product is very easy to understand.
Nationwide New Heights. This FIA is owned by its policyholders, not shareholders. So any excess money Nationwide receives is pumped back into the FIA in terms of higher index participation rates, higher index caps and lower index spreads. As an example, New Heights currently has a 165% participation rate on the J.P. Morgan Mosaic index, a multi-diversified global index that invests in stocks, bonds, and commodities. Shareholder-owned insurance companies offer no more than a 130% participation rate on this index.
Another plus is that New Heights’ optional index rider tracks an index daily, and when it reaches a new high, locks that into the FIA’s benefit base. “This, too, offers much more upside potential than average,” says an annuity industry expert familiar with the product. New Heights is rated A+ by both A.M. Best and Standard & Poor’s.
Please call 1-866-223-2121 or complete the form below to request more information about these featured products.