Old Index Annuities Can Still Grow
This is just a little something that may help those who have one of the biggest index annuity objections. Many don’t like the fact that interest rates, meaning cap and participation rates in contracts can change from year to year. Never mind the economics that explain option pricing, popular thought suggests that insurance companies are just out to line the company’s pockets with your money.
I’m going to give you some details from a seven year contract that I sold eight years ago. That means for the past year, this contract owner was free of surrender penalties but decided to keep the contract because it still had potential and had done reasonably well over the years.
Based on market timing the owner locked in a nice gain. In spite of the fact that the insurance company could have adjusted rates over time, excellent potential still existed so long as you know how to use the components.
Below you can see the index allocation and associated weight of each in the contract for the past year. The money was more or less equally weighted to three S&P 500 options that include two based on annual point to point and one based on monthly point to point. All grew but one was a little better than the others so it carries a greater weight today.
At each anniversary, the owner can change the weight of each allocation to pursue a more conservative or risky strategy. Remember, risk doesn’t mean you can lose money. Rather, it means greater upside potential with the risk of only getting 0%.
Now take a look at the credited rates for each index allocation. Yes, the annual point to point options have come down a bit in capped potential but the monthly point to point is still high enough to create excellent yield in the right circumstances.
After allocation weight and associated index yields are factored, the contract had a blended yield of 7.42%. Not bad for safe money with protected gains and no fees. Don’t forget that the owner was not bound by penalty from moving the money. She kept it because she liked it and was rewarded with another nice yield.
It’s neither magic nor scary, but easy to understand if you have an open mind. Rates in an index annuity contract can and will move in either direction depending on interest rates and options pricing. Old index annuities can still grow and this is proof.
Enjoy your weekend…
Bryan
(800) 438-5121
Apparently the participation rate for your annuity example has not dropped over the last seven years?
We’re into our third year with our fixed index annuity.
2019 participation rate for our chosen market indexes was 70%.
2020, using the same indexes, the participation rate dropped to 61%.
2021 rate with same indexes, will be 31%.
The minimum rate in our contract is 10%.
Are these annual drops in participation rates typical of annuities?
I really enjoy reading your weekly annuity emails.
Thanks.
Tom – in this example it was all cap rates for each of the three indexes. Yes they have dropped a bit but still hold the potential to produce good yields. In this case it was the monthly point to point option that did really well. Had that not been a part of it the contract would have gained about 4%. I’ve been meaning to write a more detailed explanation of rate adjustments and it looks like now may be the time. Check it out next week.
I am not as well versed in FIA’s as you of course but in my experience it is difficult to find one that will let you spread the bet on multiple strategies. They usually want you to bet the whole booty on one strategy and I don’t like that as well and enjoy having the option to diversify. If I had one guess I would say this is a Great American product for they are well known to keep rates up and honest thereby earning your business. Good read today brother.
Tony – most products allow for splitting funds between options. The most consistent contracts I’ve seen are owned by people who split the money between five or six indexes and leave it alone. It has worked well and is a good conservative strategy.