A small handful of FIAs, each with an A or A+ financial rating, are now offering markedly better terms!
Harvey Peters, whose name has been changed to protect his privacy, is an Arizona retiree who has a bone to pick with growth-oriented fixed indexed annuities (FIAs). A few years ago, he invested $50,000 in a growth FIA that offered a 40 percent index participation rate on the S&P 500. While this is obviously a lot less than he can pocket in years in which the S&P 500 rises, Peters figured it was still a good deal given that he would lose no money in a down market – the case for all FIAs.
But he got annoyed when the annuity dropped the index participation rate to 30 percent a year later, and he is worried that the participation rate may decline yet again in a couple of months, when the annuity once again has the option to recalibrate its terms. Peters is sticking with the product. Otherwise, he would have to pay a stiff surrender fee. But he pledges that he would never again purchase an annuity from this insurance company.
“Unfortunately, what you see in many FIAs is not necessarily what you get,” says an annuity broker familiar with this incident.
There are lessons here for all annuity buyers who purchase popular, growth-oriented fixed-indexed annuities. One is that the terms they get when they buy the annuity often change later, and when they do, it’s almost always for the worse. This is known as renewal rate anxiety, and annuity pros say that at least 50 percent of annuity buyers are oblivious about it until it unexpectedly impacts them.
It’s in the fine print, but who goes to the trouble to examine that?
Another lesson is that most FIA index participation rates are OK but nothing to get excited about, even if the initial rates go the distance. This is because the lower the payout, the more profit that insurance companies reap.
There is good news, however. Savvy annuity buyers can now materially temper this state of affairs and hence enjoy more bang for their buck. A small handful of FIAs, each with an A or A+ financial rating, are now offering markedly better terms and one of them – Pacific Life Index Foundation – offers an additional feature – a so-called fixed account option. This might appeal to annuity buyers temporarily concerned about a likely downdraft in the stock market. Some other FIAs also offer this feature but with less attractive terms.
Let’s start with the main attraction first. In addition to Pacific Life, the other aforementioned FIAs are Brighthouse SecureAdvantage 6 and Athene AcuMax 7. All of them offer markedly better stock index participation rates than other FIAs. They are still unable to fully compete with stock mutual funds and ETFs in strong market years, but they are materially closing the gap. And like all FIAs, of course, they still guaranteed no losses in down years.
Over a long span of time, the S&P 500 has returned an average of about 10% annually. By comparison, among Pacific Life Index Foundation owners who invest at least $100,000 and sign on to a five-year contract, the stock index cap rate is 9.55%. The rate available on a seven-year contract is 9.65%. And it’s 9.9% on a 10-year contract. These are all yearly numbers, reported point-to-point, and unlike the case among many FIA competitors, they are guaranteed not to change over the course of the contract.
Brighthouse solely offers a six-year contract. Those who invest at least $100,000 in this annuity will get 85% of the upside of the S&P 500 over this period. Those who invest the minimum of $50,000 get 75% of the upside. Interest isn’t credited until the end of the contract.
Athene AcuMax 7 solely offers a seven year contract. Those who invest at least $100,000 will get 90% of the S&P 500 upside over this period. For those investing in the $10,000 minimum, the return is 85% of the performance of the S&P 500. Interest isn’t credited until the end of the contract.
Brighthouse and Athene AcuMax are very simple contracts. The Pacific Life product is more complex, which turns out to be an advantage. What it offers — and the others do not — is the fixed account option. This might appeal to select Pacific Life owners who get nervous about the stock market’s prospects over the next 12-month period and want to switch out of the market into a guaranteed income option. Those who do so and have invested at least $100,000 receive 4.5% over the 12-month period if they have a five-year contract. Those with a seven-year contract receive 4.6% and with a 10-year contract 4.75%.
Again, these numbers do not change over the life of the contract. So, for example, if somebody with a 10-year Pacific Life contract exercises the fixed account option in year No. 2 and again in year No. 9, he or she would receive a 4.75% return over each 12-month period, regardless where interest rates stand at the time.
Some new investors in Pacific Life may in fact come to the conclusion that signing on to the annuity’s fixed account option makes sense currently. The stock market so far is up this year, as it was last year, mostly because the Federal Reserve has essentially said it has stopped raising interest rates after doing so 11 times since 2022 and will start trimming rates in 2024. The backdrop, however, is deteriorating.
Inflation appears to be cropping up again after dropping sharply, now suggesting that interest rates may not drop in the foreseeable future after all. This has been undermining stock prices, a trend that may continue. Persistently high-interest rates are typically a negative for the stock market and could easily undermine stocks over the next 12 months.
On the other hand, savvy investors know that trying to time the market is a sketchy affair and often backfires. Since the Pacific Life annuity is at least a five-year contract, it may be best to weather the market storm, notwithstanding the continuation of a negative pattern.
Ultimately, either option is probably fine. Historical stock market data shows that two negative annual downturns or more in the S&P 500 are rare – according to Chaikin Analytics, a platform for stock trading ideas, this has happened only twice in more than 50 years. In addition, bear in mind yet again that all FIAs are guaranteed not to lose money. So folks who purchase any of the aforementioned annuities almost certainly will be winners. And this is particularly true of the three FIAs discussed.
This is mainly because they don’t practice gamesmanship. Again, what contract owners are told and therefore what they expect are, in fact, that you get — period. The aforementioned tale about the discontent of Arizona retiree Harvey Peters is troublesome. But those who purchase any of the three FIAs discussed need not be phased whatsoever, mindful there will be no surprises.
