At first glance, the opportunity to receive a 10% bonus is a very attractive, but beware… This annuity has a very long surrender period! One of the longest in the industry today, this annuity has very low caps and participation rates. This is not an accumulation product so, unless your looking to add the Lifetime Income Benefit Rider and you have determined that YOU NEED the rider, don’t expect high returns on this annuity, and frankly there are much better options available in the marketplace today for accumulation. With such a long surrender period this is one you may have to live with the remainder of your retirement years. So we put this in the Best Use category for Income or Long Term Care.
Type: Fixed Index
Best Use: Income, Long Term Care
Company: American Equity Investment Life Ins Co.
Rating: AM Best, A- Excellent, S&P A
Surrender Period: 16 years
Issue Ages: 18-80
Liquidity: Annual Free Withdrawals 10% of Accumulation Value, after 1 year, 100% Liquidity after 3rd Year for Nursing Home or Terminal Illness, if issue age 75 or less.
American Equity is a solid U.S. publicly traded company domiciled in Des Moines, IA. They are one of the leading index annuity companies in the industry with over 41 billion in assets. Started in 1995, American Equity has achieved remarkable growth, becoming #3 overall in index annuity sales. American Equity is definitely a very good and fair company that has always had very consistent renewal rates. So from a company standpoint they are a solid choice.
First let’s take a look under the hood and see how the engine works with regard to crediting methods and you will see this annuity lacks any real horsepower to pick up gains.
Current Crediting Options
The Bonus Gold offers the following crediting methods with current rates:
Annual Point to Point: S&P 500, Dow, 10-year US Treasury, all with 2.25% cap.
Annual Point to Point Bond, 5.15% Cap with 2% asset fee
Annual Point to Point S&P 500, no cap, 15% participation
Annual Monthly Average, S&P 500, Dow, both with 2.25% cap
Annual Monthly Average S&P 500, no cap, 25% participation
Monthly Point to Point S&P 500, 1.2% monthly cap
S&P 500 Aristocrats 5% Low Volatility Index, No Cap, 3.75% Asset Fee
Performance Trigger, (Gains of 2% as long as the S&P 500 is positive) 2% Cap
Fixed Rate 1.15%
A lot of choices are available with the Bonus Gold, so how do you know what is the best option and what exactly have the returns been with the current cap rates? We ran multiple illustrations on American Equity’s software to find the highest paying crediting method. These are the highest 10-year annualized returns over the last 20 years of the market, 1996 through 2016.
Annual Point to Point: S&P 500 2.25% Cap 1.57%
Annual Point to Point Dow 1.80%
Annual Point to Point: 10 year US Treasury 2.25% cap 1.97%
Annual Point to Point Bond, 5.15% Cap with 2% asset fee, .062%
Annual Point to Point S&P 500 no cap 15% participation 1.92%
Annual Monthly Average S&P 500, 2.25% cap 1.69%
Annual Monthly Average, Dow, 2.25% cap 1.65%
Annual Monthly Average S&P 500 no cap 25% participation 1.43%
Monthly Point to Point S&P 500, 1.4% cap 1.35%
S&P 500 Aristocrats 5% Low Volatility Index No Cap 2.87%
Performance Trigger 2% Cap 1.40%
Fixed Rate 1.15%
The winner is the uncapped S&P 500 Aristocrats’ 5% Volatility index with the highest 10-year return over the last 20 years at 2.87%. The lowest 10-year return was 1.87%. Since this is a 16-year contract, can we say best case 2.5%? If we add in the 10% bonus, best case would be a total annualized return of 3.11%.
If this was a shorter-term annuity, we could live with the low return history, but to lock up funds for 16 years, you can see why we don’t recommend it as an accumulation annuity.
Lifetime Income Rider
So let’s now take a look at the Lifetime Income Benefit Rider (LIBR), that can be added, to see how this annuity performs as an income/long term care play.
American Equity offers this rider with 3 choices: 6% guaranteed for 10 years and a declared rate for the remaining 10 years (To be determined at that time) with a .90% percent fee.
6% guaranteed for 10 years and a declared rate for the remaining 10 years, but the income payouts can double if there is an inability to perform 2 out of 6 activities of daily living after the policy has been in force for at a least two years. This is known as their Wellbeing Benefit Rider and has a fee of 1%.
With the last option the rider rollup rate is determined by the index gain in the account value. Currently they are crediting 400% of the gain in the account value, so for example if the gain is 2% the rollup rate will be 8%. This is only guaranteed for the first year and could change. Also in years there are not index gains then the rider will not have any gains as well. The cost for this rider is .90%.
Keep in mind the fee is based on the higher Income Account Value, which is a hypothetical number used to calculate income and not the actual account value, which is your real money. Over time the fees for the riders can add up significantly. This is why unless you’re sure you will use the rider, adding it can be very expensive over time. How expensive? $100,000 invested over 20 years is just over $25,000 in total cost!
So which option is the best? First of all since the indexing option is simply index gains, and since we have already determined a best case scenario for the best performing index option, the low volatility index, has averaged at best, a 2.5% gain, then this rider has the potential to earn 10% per year. Unfortunately American Equity will only guaranteed the 400% index credit to the rider for one year, so this could change significantly. At this point since it is a total unknown, there is a risk that this could underperform significantly in the future.
If you expect to take income within 10 years, and you want a guarantee, then the 6% rider is the best option. If you’re younger and need more time for the income account to work, the last choice may be your best bet. IF this is the case there are far better product options out there that will guarantee the returns far better then just one year.
Let’s use an example of how the income rider could be used in retirement for Joe and Jane both currently age 60. They have $100,000 to invest and plan to take income at age 70 in 10 years. Let’s assume they choose the LIBR with the 6% option. With the Bonus Gold, both the account value and the income value will receive the 10% bonus. Let’s also assume they choose the joint lifetime income option, which will provide a guaranteed income until the last person passes on.
In 10 years their lifetime income would be $8,372 per year.
Is using the LIBR a good option for Joe and Jane? Let’s use the old 4% rule for withdrawals, which basically means taking a 4% withdrawal from a portfolio and expecting it to last 30 plus years. (There has been new evidence that this may too high a withdrawal rate based on the low interest rate today with bonds, but for simplicity sake let’s just use this.)
Let’s assume instead of using an annuity, a balanced portfolio of stocks and bonds was used to grow the account for the 10-year period. To sustain the $8,372 income, the portfolio would need to grow to $209,300 over the 10-year period. The balanced portfolio would need to earn an annualized return of 7.67%. That would be a very good return that we can expect to receive over 10 years for a balanced portfolio isn’t it? If you think that you can do better investing your funds in the market then using an annuity may not be the best choice.
What is nice about the LIBR is it is guaranteed and Joe and Jane know exactly what their income will be at age 70 so they can plan accordingly. If they decided to add the Well Being Rider that doubles for long term care needs then this starts to look even better.
So for younger people the rider works out well, if the rider has time to work over time. If Joe and Jane looked to turn on their income within the first few years, we have found the rider is less valuable and instead a good accumulation annuity may be a better option.
Here’s another consideration, what we have found in our analysis, is for older retirees the rider becomes less valuable. We have done extensive research on using riders compared to just using a good accumulation annuity, and this should be part of your analysis before your decide to purchase an income rider.
Long Term Care Benefits
Another option within the choices of the Lifetime Income Benefit Rider is the Wellbeing Benefit which doubles the income payment if one is unable to perform 2 out of 6 activities of daily living, if a single payout option is chosen. If a joint payout is selected then the payout decreases to 150% of the income amount.
The ADL’s include bathing, dressing, transferring, toileting, continence and eating. This benefit can be utilized anytime after the first two years of the initial contract date of the annuity, and will double the benefits for 5 years.
Compared to other Income Riders with LTC benefit, where American Equity falls short, is with the payout only increasing by 150% for the joint payout. There are other LTC Income riders that will double the payment even with a joint payout.
There are a number of considerations you should keep in mind regarding the Long Term Care benefits within the rider. One is if the accumulation value of the annuity goes to zero, due to withdrawals, the doubler will no longer be available. There are a few lncome Riders with the Long Term Care doubler, where the doubler will continue even if the account value reaches a zero balance. This can be important at older ages after receiving income for many years.
Another important consideration is if the annuity is just in one person’s name, which would be the case if it were an IRA, will it still cover the spouse even if they are not on the contract? American Equity does allow the LTC benefit of the rider to be used even if a spouse is not listed on the contract, which is a nice feature.
Overall the LIBR with American Equity has offered a reasonably competitive Income Rider and with the LTC feature it stacks up well with the competition and in some cases may be the best option for providing a Guaranteed Lifetime Income.
Shop Income Riders Before You Decide
How do I know if the Bonus Gold with the LIBR from American Equity is the highest income available today? It is a very competitive marketplace for income riders, and it varies considerably depending upon your age and when you expect to take income, so the only way you will know is we need to run a report against all the riders in the industry today to find the best opportunity for you. We have the ability to provide you this report free of charge so fill out the form and make sure your getting the best deal before you commit yourself for 16 years!
Overall we don’t like the 16-year surrender period in the Bonus Gold. There are two considerations where it isn’t an issue; one, you don’t expect to live past the surrender period, in which case the entire account value including the bonus will go to the heirs, or two, if the LIBR is used and after careful analysis, it is determined to be the best option available.
For an accumulation annuity, the Bonus Gold falls short, with very low cap rates and only one uncapped point to point option with anything substantial, the Low Volatility Index, which has a pretty high asset fee of 3.75% before any gains are realized. Buyer beware, as the sound of a 10% bonus sounds very appealing, but has the rest of the story been told to you regarding what type of returns you can expect? Here is an example of where it really pays to shop before signing on for 16 years!!