A Fixed Indexed Annuity That Could Rival the Unbridled Performance of the Stock Market
A relatively new type of annuity – a structured variable or ‘buffered’ annuity – makes it easier for prospective annuity buyers to break into the stock market because, unlike a variable annuity, it offers some downside protection. Hence the adjective, “buffered.” And a recent structured variable annuity entrant – Athene Amplify – is arguably the best of all.
The Security Benefit Strategic Growth FIA is a bit more generous than most. Strategic Growth is offering a 50% participation rate on the S&P 500, compared to 40% to 45% at competing growth FIAs. It’s also offering a slightly better deal to those who take the option of a higher index participation rate in exchange for accepting a 2-percentage point index spread.
A creative Athene fixed indexed annuity could make you a big winner. In effect a hybrid of a growth FIA and an income FIA, the Athene Ascent Pro 10 offers a stronger chance to beat the going guaranteed rate by doubling annual gains in the index and adding them to the annuity’s income base.
AXA’s Structured Variable Annuity offers a nice compromise between two mainstream annuities, and may appeal to stock-oriented annuity investors. In exchange for receiving a higher earnings cap than offered by FIAs, investors pick up part of the losses in an underlying index in significantly down markets. But they are often structured in such a way so that owners are likely to come out ahead of the game in a multi-year scenario.
Should investors with significant stock market exposure lower their risk and protect their gains? In large part, it depends upon your risk tolerance, as well as your age. Bear markets typically accompany recessions and can be particularly painful for retirees, most of whom no longer earn a paycheck. On the other hand, sound stock market investing is a long-term game.
The AXA Retirement Cornerstone Variable Annuity — particularly attractive for those younger than age 65 — offers a better-than-average guaranteed income rider, more generous exposure to the stock market, the freedom to not take all of your monthly payment and reinvest it, and an unusually generous enhanced death benefit for those willing to pay up for a brighter legacy.
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.
A rare exception, the Nationwide New Heights 12 is a fixed indexed annuity offering both a competitive index participation rate for growth and a competitive guaranteed income rider.
Both of these fixed-indexed annuities have generous investment terms and no long-term commitment due to their lower than average surrender periods.
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.
Watch Somerset Wealth Strategies CEO Tom Hamlin explain the benefits of the AIG Assured Edge Income Builder, a Fixed Annuity with a Guaranteed Lifetime Withdrawal Benefit.
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:
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.”
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.
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.
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.
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.
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.
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.
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.
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.
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.