The 222 annuity is the Number 1 selling fixed index annuity in the marketplace today! Allianz Life hit a home run when they issued this fixed index annuity in January 2013. A unique product in the industry, it combines a number of uses within one annuity. With a reasonable 10 year surrender period, it provides accumulation, lifetime income, long term care benefits, and finally an additional death benefit feature, where the Protected Income Value pays out as a death benefit over a 5 year period. There’s a lot going on with this product, which can certainly add to the confusion when one is trying to decide if this annuity is really the best option within the annuity marketplace. (Review Date 8/19)
Type: Fixed Index
Best Use: Income, Long Term Care, Death Benefit
Company: Allianz Life Ins. Co
Rating: AM Best, A+ Superior, S&P AA
Surrender Period: 10 years
Bonus: 15% on Protected Income Account only, NOT THE ACCOUNT VALUE!
Premiums: Flexible For 3 Years, minimum $20,000
Issue Ages: 0-80
Liquidity: 10% of Total Premium Paid 1 year after Last Deposit, With addition of Flexible Withdrawal Rider, after 1 Year, 100% Liquidity for Long Term Care, Base Contract allows 100% withdrawal for Nursing Home Only
Allianz designed this product by using a variation of the Lifetime Income Rider and instead of having it as a separate rider, that can be added to an annuity for a fee, they built it into the product without a fee.
So the annuity will always have two accounts, the Account Value, which is simply your deposit, with NO BONUS, and a second account, known as the Protected Income Value. This is a separate account that has an initial 15% bonus, receives 1.5% of index gains, and is used to calculate a lifetime income payout that can ONLY BE STARTED AFTER 10 YEARS. It has an option to double the income if one us unable to perform 2 out 0 6 activities of daily living so this can include HOME CARE, ASSISTED LIVING AND NURSING HOME coverage
One thing that is different with the 222, unlike most Income Riders where the dollar value is only available to calculate income and cannot be accessed, the PIV value actually pays out as a death benefit over a 5 YEAR PERIOD to the beneficiaries. NO GAINS are CREDITED DURING THE 5 YEAR DEATH BENEFIT PAYOUT PERIOD to the PIV, but at least it has actual dollar value. More on this later. Whew it’s complicated already, right?
Let’s unpack each portion of the annuity to see how it stacks up to the competition by first looking at this as an accumulation product. Allianz offers a number of different crediting methods, but one thing we will see right away, there isn’t much horsepower here to pick up index gains. Since this product was issued in 2013, caps have been reduced and margins increased because interest rates have dropped considerably.
Allianz software computes the highest, lowest, and most recent performing 10 year period over the last 15 years for the Barclay’s index and the last 20 years for the rest of them. Let’s look at the highest and lowest returns:
AP2P (Annual Point to Point) – MP2P (Monthly Point to Point)
AP2P S&P 500, with a 2.5% cap 1.74% 1.49%
AP2P Russell 2000, with a 2.75% cap 1.92% 1.47%
AP2P Nasdaq 100, with a 2.50% cap 2.25% 1.39%
AP2P Bloomberg Dynamic Balance Index II ER , 60% participation 3.65% 2.47%
AP2P Bloomberg Dynamic Balance Index II, with a 2.75% cap 2.68% 2.47%
AP2P Bloomberg Dynamic Balance Index II, no cap with a 3.85% margin 2.41% 1.81%
2Yr P2P Bloomberg Dynamic Balanced Index II, 85% participation 5.06% 2.74%
AP2P Pimco Tactical Balanced Index, with a 2.65% cap 2.26% 1.95%
AP2P Pimco Tactical Balanced Index, with a 3.85% margin 2.81% 2.47%
AP2P Pimco Tactical Balanced ER Index, 60% participation 3.66% 2.47%
2Yr P2P Pimco Tactical Balanced ER Index, 85% participation 5.06% 2.47%
MP2P S&P 500, with a 1.3% per month cap 2.20% 1.54%
MP2P Nasdaq-100, with a 1.6% per month cap 2.87% 1.46%
MP2P Russell 2000, with a 1.6% per month cap 1.41% .60%
As you can see, the Pimco Balanced index with a 3.1% margin, performed the best at a rate of 3.55%.
Now if you picked the standard indexes, like the S&P 500, your best 10 year return over the last 20 years would have been in the Monthly Point to Point strategy at 2.73%. The rest of the options are very low, many of them between 1 to 2 percent. So one thing is very obvious, this is not a good accumulation annuity. In most cases simply taking out a fixed annuity with a 2.5 to 3% fixed rate, depending on the company and state of issue, guaranteed over 10 years, would have outperformed the Allianz 222. Hmmm..this is the number one selling index annuity in the industry? So obviously the sizzle isn’t in the accumulation value but the Protected Income Value. So let’s see how this works.
Protected Income Value (PIV)
Once again the separate PIV account receives a 22% bonus. Wow you might be thinking..are you kidding me? You mean 22% is added to the account as a bonus? Sign me up! This is where most people are hooked and just like that the sale is made, and most buyers unfortunately don’t totally understand how this works. So how can Allianz afford to provide a bonus of this size?
How Can they Offer a 15% Bonus?
Let’s figure this out, because if it looks too good to be true…….you get the picture. The 15% bonus is on the the PIV and once again the PIV is a separate account that cannot be accessed for withdrawals or as a lump sum, but the value is used to calculate income, and what is remaining of the PIV pays out as a death benefit to the beneficiaries over a 5 year period. Ok so the 15% bonus isn’t accessible while I’m alive.
What we will see later is if the annuity is used for income for younger ages, the PIV value could be reduced to zero, so where did the bonus go? It was used in their actuarial calculations for providing lifetime income where the payouts are first of all the clients dollars and only if they are still alive and the account value goes to zero, will the Company actually pay out any funds.
Another way to offset the bonus, is if income is never exercised, then the PIV value is paid out over a 5 year period without any interest. By not crediting interest during this period, it helps to offset the 22% bonus.
How Does the PIV Grow?
After receiving the 15% bonus, the PIV value will then grow by taking the index gains times 150%. Ok, so if you picked the Pimco uncapped strategy with the highest performance of 3.55% over ten years, then your PIV would have averaged 5.32%. This sounds a little better for performance, and really since Allianz didn’t offer any bonus on the account value, this is closer to what you would expect to make in a decent index annuity over ten years. But we can’t get to the funds in this PIV account except by dying. So it really is a life insurance or death benefit amount! So am I really just buying a type of life insurance contract? We will come back to this later.
PIV for Income
So let’s now look at the Protected Income Value as an income account and see how this works. One thing we have already explained is how this grows, 150% of index gains. Since the caps are very low, what we will experience are pretty low crediting rates, 4 to 6% at best, in the world of income riders. I will point out one thing that can happen that can be very beneficial, during the last year since volatility was so low, some of the indexes actually picked up double digit returns which really accelerated the PIV. IF you catch a real good year in the market, this can do better than the guaranteed riders, with many today guaranteeing rollup rates of 6 to 7%. Let’s look at an actual case and compare this to a leading annuity that provides an 8% bonus on the account value and the income value, and the income account guarantees a 7% rollup rate. Let’s assume we have two 60 year old’s who invest $100,000 and want to turn on a joint life income stream at age 70. Remember the 222 requires a 10 year waiting period before the guaranteed income can be exercised. We will use the highest performing index over the last 10 years for the 222.
Allianz 222 Leading Income Rider
Protected Income Value $205,412 Income Rider Value $222,591
Joint Payout Rate at 70 5% Joint Payout Rate at 70 4.93%
Income Payout Amount $10,202 Income Payout Amount $10,974
So right away we can see initially, the payout with the 222 is lower by $772.00 per year. There’s more to the story, there is a feature with the 222 that is very important and unique in the world of guaranteed income. The 222 will increase the income amount each year by the same percentage gain as what was credited to the PIV value, 150% of index gains. So if the index earned 3.5% and the PIV credited 5.25%, then the income would increase to $11,822 the very next year. If the index continued to perform the same as it did in the previous 10 years over the following 10 years, at age 80 the income would have increased to $18,805! Much higher than the guaranteed payout of $10,974 from the leading annuity.
This is sounding pretty good isn’t it. The key to this product has everything to do with index gains! Ok so let’s look at another illustration if we weren’t so lucky to pick the best performing index, and instead just used the highest S&P 500 index strategy, the Monthly Point to Point which averaged 2.73%. At age 70 the income payout would have been $9,064, and at age 80 it would have been $13,467. In this example the 222 would have paid out less then the guaranteed income rider of $10,094, but eventually it caught up and surpassed the guaranteed income.
Now here is another really important point, in the example I used the age was 70 when they wanted to turn on their income. The 222 uses age bands for their payouts, so anyone 70 to 79 will have the same percentage payout on their Protected Income Values. Some carriers will actually raise the payout rate .10 for every year they get older, so a 79 year old may payout 5.7% where the 222 would be still 5%, which can really make a difference between products.
Summarizing the income feature; the payout rates are solid, but the best thing is the income increases with index gains. Keep in mind you have to wait 10 years before turning on the rider, which is one feature you have to be careful with, so using this annuity for income is better for younger clients with good life expectancy, but not so much for older clients who may need to turn on income sooner. Another strategy that can be used, if income is needed earlier, is to take free withdrawals before the 10 years and the PIV will still increase by 150% of index gains, but will be reduced by the same percentage as the amount of the free withdrawal from the account value.
Long Term Care Benefit
The PIV will double the payment AFTER the 10 year waiting period for confinement in a nursing home or assisted living facility. It requires at least 90 days of confinement within a 120 day period. It will provide the increased payment until the account value goes to zero from withdrawals. Ok, pretty solid benefit, it’s good that it includes assisted living as well. Having to wait 10 years to use it makes it less useful for older clients. The other issue is, in a lot of cases by the time younger clients that have been taking income, may need to use this benefit, the PIV balance could be zero and therefore would nullify this feature. Some annuities with Long Term Care doubling will still allow the increased benefit even if the account value is at a zero balance from withdrawals.
Let’s come back to the PIV value. If we look back at our example of the two 60 year olds taking income at age 70, by age 82, there may no longer be any value left in the account value or PIV, so there isn’t a death benefit available. If they both died by age 83, nothing may be left for the estate, so how much did they really get out of their 100k deposit? According to the Allianz illustration, a total of $183,509 is paid out. This is where the lower accumulation within the annuity shows up. But since no one knows how long they will live, if there is good longevity for at least one person, and if the long term care doubler is used at younger ages, it still could pay out a lot of money.
Older Clients Parking Rainy Day Money?
What about an older client, say age 75, who isn’t really sure if they will need to use the funds and they like the idea of the PIV death benefit. If they lived for 10 years and didn’t take any funds from the annuity, the PIV would be $181,928 paying out over 5 years to their heirs. With the 15% bonus, the total PIV value grew at a 6.18% annualized rate, based on the Pimco uncapped index, averaging 3.57%. Again not a bad deal. IF we calculate the account receiving no interest over 5 years while the PIV is being paid out, assuming you could have earned 3% interest, there is a lost opportunity cost of around $17,728. So you could say the $181,928 is a net $164,199. Now this brings the return down to about 5.08% over 10 years. Still not a bad deal.
Compared to other annuities that provide an increased death benefit, this stacks up very well, especially since there is no age limit to how long the death benefit will continue to grow. The only other strategy that may be better for death benefit maximization, is if the funds instead were funded into a life insurance contract. Most likely the death benefit in a life insurance contract would be greater, assuming of course you were able to qualify due to health. Keep in mind the proceeds of a life insurance policy are tax free, where annuity proceeds above the deposit for non qualified accounts are taxable, and all funds from IRA’s are taxable.
IRA’s Using the PIV Death Benefit, Consider This!
Here’s another important consideration before purchasing the 222 for the death benefit of the PIV. If this is an IRA that is going to a spouse, and the PIV hasn’t been exercised for income, they can simply take over the entire account, including the PIV and continue to accumulate it. Ok no problem. But what happens if it goes to the children? A very important planning strategy in the world of IRA’s, is for children beneficiaries to take an IRA as an Inherited IRA, and continue to grow the account tax deferred, while taking a small required distribution each year. The worst thing they can do from a tax prospective, is to take an IRA as a lump sum, which will cause immediate taxation and it is taxed as earned income in the year they receive it.
Since the PIV value requires a payout over 5 years, this negates the ability to stretch out the IRA over their life expectancy. By spreading it out over 5 years, it could reduce the tax liability, but it is nowhere close to the tax advantage of stretching it out. So if this is an IRA and your using it for the death benefit feature, take a moment and consider this!
I know this has been a lengthy discussion, but this product has a lot going on. Let’s boil this down to find out where the 222 works in a good retirement plan.
Lifetime Income for Younger Clients. This is definitely the real strength of this product. The payout percentages are good, but the best part is the increasing income based on 150% of index gains. Add in the doubler for nursing home and assisted living, and you can see how this is a very useful product for addressing two important needs in retirement, guaranteed lifetime income, and long term care.
Now there is still the question, how does this compare to other products? Since the PIV growth is totally dependent on index gains, rather than a guaranteed amount, the only thing we can do is compare it to other income products where the income value is performance based, and also have the increasing income option. There are other products out there that have similar features so you really need to shop the market to make sure the 222 is your best option. The tricky part is depending upon your age and when to take income can really make a difference between annuities. The one area that Allianz could have improved, is to increase the payout by .10 for each year rather than using the same rate for a nine year window, ex. 60-69, 70-79. This has opened up the door for other products to show a higher income in some situations.
Using the Death Benefit Feature of the PIV for Older Ages
This is the other useful feature the 222 brings to the table for retirement planning, maximizing the estate to the beneficiaries for funds not being used by the owners. With no limit on the rollup due to age, this can be a very good feature as well. How do we know this is the best option against other annuities? Really there are two things to compare against, a real strong accumulation annuity, that performs higher than the PIV value, and allows a lump sum distribution, or a life insurance policy that can accelerate a higher death benefit and also be much more tax efficient. Again it pays to shop and make sure this is the best fit…in many circumstances it still may be the best option.
Not an Accumulation Product
Unless your are going to use PIV value for income, long term care, or as a death benefit, this is the wrong annuity. For just accumulation, the returns are very low and there are much better products available today that have displayed much higher historical returns. So be sure you have determined that this annuity is a good fit for you before purchasing the 222.
Allianz did a great job designing the 222 by creating a multi-faceted product that can address three important retirement planning needs; income planning, long term care planning, and maximizing the asset to the heirs. It has been a hit in the industry, as it is the number one selling index annuity in the industry today as of this writing. Nevertheless everyone is different and it is important to make sure it is still the best fit for you!