An impartial review of the Allianz Core Income 7 Annuity

annuitiesThe annuity business has grown in popularity as investors, especially those nearing retirement, look for options to protect themselves from stock market volatility and give them a decent income stream in retirement. With over $200 billion in annual sales, the annuity industry is big business with lots of salesmen trying to persuade you to make a purchase.

Today I will dig deep into the Allianz Core Income 7 annuity which has been requested by several readers in recent weeks. It currently is one of the top 10 best selling annuities on the market. Sales of indexed annuities, a fixed annuity that provides a minimum guaranteed rate of interest combined with an interest rate tied to movement of an index, increased to $54.5 billion in 2015, a 13% gain year over year. This is the biggest percentage increase of any form of annuity.

You will often hear that annuities are sold, not bought. This is exactly why I will go in depth into some of the most popular annuities because there is shockingly little information available about them. Most of the information comes from the companies that sell the annuities and they gloss over the fees, risks and downsides. More importantly, annuities have grown into extremely complex instruments which even the most season professional may have trouble deciphering. Indexed annuities, often the black sheep of retirement products, have a history of being so complex that they were a focal point of litigation and regulatory action in the 2000s. Insurers paid millions in fines. While the negative attention led to a change for the better among the carriers, indexed annuities are still complex and difficult to truly understand for many investors.

It is of the utmost importance to make an informed decision. I have dealt with too many clients that have come to me asking for help getting out of an annuity and I can’t help after the fact. Stiff surrender penalties can’t be avoided for many years after you sign on the dotted line.

Perspective That You Can Trust

I am writing this blog from the perspective as a curious analyst. I am totally impartial as I am a fee only registered investment advisor. I don't get paid to sell annuities nor do I personally sell them. I hope to bring a unique perspective to this topic drawing on my years of experience analyzing companies as a research analyst. I’ve met with hundreds of company CEOs and CFOs, including Steve Jobs and Richard Branson, and I will use my analytical skills to break down these complex instruments into something easier to understand.

While many investment professionals hate annuities, I do not believe that they are all bad and some of them can make sense as a small part of your investment portfolio. Annuities should never, I repeat never, be the large majority of your portfolio because of their lack of liquidity which is one of their biggest drawbacks.

Issuer Review: Allianz SE and Allianz Life

It is important to look at the issuer of the annuity first because annuities are NOT a guaranteed investment of any sort. This is important to note so I will say it one more time. Annuities are NOT guaranteed. They are only backed by the ability of the issuing insurance company’s ability to pay. Therefore if the issuer goes bankrupt, you are at risk of losing everything! States provide differing levels of protection but they are not funded reserves like FDIC insurance.

Allianz SE is a global financial services group headquartered in Munich, Germany.

It is the 2nd largest money manager in the world. Allianz in North America includes PIMCO and Allianz Global Investors. Here is a chart of Allianz SE:allianz_se_chart_1.png

Allianz Life receives solid ratings from all the leading rating agencies. S&P affirmed Allianz Life's AA Rating (very strong) with a stable outlook on 12/18/15. This rating is the third highest out of 21 possible ratings. Moody's rates the company A2 with a stable outlook.

Allianz is the #1 seller of fixed annuities in the US. In 2012 Sheryl Moore, CEO of annuity research firm Wink said she thinks Allianz's relative new "Allianz Preferred" program has boosted sales. She says, "The secret sauce is in that commission structure." On the Allianz Core 7 Annuity, agents can earn a 5.5% commission in year one in addition to 2.75% commissions in year 2 and 3.

Annuity Review: Allianz Core Income 7 Annuity

Maximum age for initial purchase: 80

Minimum initial premium: $10,000; additional premium accepted through first 3 contract years

Core Income Benefit Rider: 1.05% annual fee (This is not an optional rider)

Website: www.allianzlife.com

Product launched October 2013

Beware of Surrender Fees

Surrender charges and period for this annuity are the typical of most indexed annuities. Surrender fees go for 7 years and are over 7% (but really over 10%) for the first 3 years! This is essentially illiquid for those years unless you just want to give your money away to Allianz.  

allianz_core_7_surrender.png

In addition to surrender fees, if you partially or fuller surrender the policy, it will be subject to an MVA (market adjustment value) during the surrender charge period. An MVA will also apply if you annuitize prior to the 6th contract year or if the annuity payments are taken over a period of less than 10 years. The current MVA reference rate is 2.98% on 3/10/16. This is essentially a backdoor surrender charge so add 2.98% to the surrender fee schedule above. This is a first for me. I've never seen anything like this before. I guess they didn't want to show double-digit surrender fees in the first 3 years; instead they use this slight of hand.

I believe surrender fees are one of the worst features of annuities. These are huge lockup fees and if you need the money, they sock it to you. This is why annuities should NEVER be a significant part of your investment portfolio because they are essentially illiquid for many years. Unless you are positive you will not need access to these funds, then annuities are NOT for you.

The Allianz pitch as per their brochure

allianz_core_7_brochure.png

 Allianz highlights these points:

  • increasing income potential
  • asset protection
  • tax control

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How will you likely be pitched this annuity?

This indexed annuity (also called an equity-indexed annuity, fixed-index annuity or hybrid annuity) will likely be packaged around two main components:

1. Principle protection with upside potential from their index choices

2. Lifetime income withdrawal options with potential for increases

Like the Allianz 222, I'm quite certain that the Allianz Core Income 7 annuity is being pitched too aggressively in terms of expected return. Most agents are recommending the Barclays US Dynamic Balance II Index because of the stellar results over the last 10 years. However they may neglect to tell you that the index was just created in April 2015 and since then the live results have been lousy. Here is a chart of the Barclays US Dynamic II Index since launch.

barclays_us_dynamic_balance_ii_index.png

The Core Income Rider comes at a stiff price of 1.05% annually for the life of the contract so you can subtract that from your returns every year as well.

In the end, this is just another flavor of index annuity. Given the ultra low interest rate environment, they are unlikely to produce returns more than 2-4%. The guaranteed income stream is an attractive piece to the puzzle which will work best for those that live into their 90s or 100s; unfortunately there are no guarantees to long life.

Let's dig into this annuity so you have a better understanding of the nuts and bolts...

Interest Crediting Options

It is important to understand that you are not investing in the underlying securities of any index. With index annuities, you are not making investment choices like a variable annuity. Your interest crediting options are mathematical formulas that the insurance company is using to attract you into buying xyz annuity. The insurance company invests your money in whatever they choose (likely diversified, conservative investments). They just have to earn a return higher than their mathematical formula (or interest crediting option) so they can pay you, their sales force, marketing, operations, etc. This is why index annuities will only generate low single digit returns in the current market environment.

For the Allianz Core Income 7 Annuity, you may select from 5 different interest crediting options: the Fixed interest allocation and Indexed interest allocations (S&P 500, Nasdaq 100, Russell 2000, Barclays US Dynamic Balanced Index II). So let's dig a bit deeper into your choices.

As of March 1, 2015, the Fixed interest allocation is currently paying 2.5%. This sounds decent because it is higher than you can get in a bank savings account. But remember that you are paying 1.05% on the rider so the true payout is 1.45%.

So onto the Indexed interest options. Many salespeople may sell you on high returns but none of these options will deliver much more than 3% returns. If someone is promising higher returns (above 5%) then you need to find a more honest agent. Whatever option and crediting method you choose, you will likely make around 3% over the long term. I will illustrate this for you.

Let's take a look at how the Allianz Core Income 7 annuity would fare (at current cap rates) over the last 10 years. Note that these are hypothetical returns because the annuity only launched in October 2013:
    Allianz Core 7
  S&P 500 point to point
2015 -0.7 0
2014 11.4 5.25
2013 29.6 5.25
2012 13.4 5.25
2011 0.0 0
2010 12.8 5.25
2009 23.5 5.25
2008 -38.5 0
2007 3.5 3.5
2006 13.6 5.25
avg 7.70 3.50

In this hypothetical example, with a cap of 5.25% (which is all states except AK, HI, MN, MO, MS, OR, PA, UT and WA where caps are 4.75%), you would have averaged 3.5% interest over the last 10 years. But once again if you take out the rider fee, then you are down to 2.45%. Over the last 10 years, the best choice was the Nasdaq which simulate at 4.5% and the worst was the Russell 2000 at 2.5%. 

The Barclays US Dynamic Balance Index is another interesting option and the most likely one that is being recommended to you. Keep in mind that this index was created April 14, 2015 so virtually all the data is purely hypothetical back-tested levels. It's unsurprising that the historic data is compelling so it makes a great sales pitch. However since the index went live, the index is down 2% through March 10, 2016. It hasn't been a year of real data for the index but the results aren't living up to the back tested results.

With that said, we will show what the current spreads (1%) and caps (7%) would look like on the back tested results. Just take it with a grain of salt that the index is virtually untested in the real world.

Date percent change cap spread
31-Dec-04      
30-Dec-05 2.0% 2 1
29-Dec-06 10.3% 7 9.3
31-Dec-07 6.6% 6.6 5.6
31-Dec-08 3.5% 3.5 2.5
31-Dec-09 5.3% 5.3 4.3
31-Dec-10 8.4% 7 7.4
30-Dec-11 4.2% 4.2 3.2
31-Dec-12 6.0% 6 5
31-Dec-13 8.3% 7 7.3
31-Dec-14 6.1% 6.1 5.1
31-Dec-15 -1.3% 0 0
  average 5.0 4.6

This is a brand new index that you shouldn't count on reproducing these exact results because the live results are pretty ugly so far. For those that chose this option in its first year of existance will probably be disappointed to see a big fat zero return that it will likely produce on the contract anniversary.

Given the back tested results, these should be considered the absolute best case scenario. If you subtract out the rider fee, you are looking at the best case as 4% returns but I'd be willing to bet that it will fall short of that in reality.

Remember with all index choices, Allianz can change the caps and spreads on the annual reset so that makes it even more challenging to forecast returns.

If you have additional questions about these options, please submit a question using our secure form. We will answer your questions within 24 hours via email. No strings attached, just a little free help to point you in the right direction.

Who should buy this product?

In summary, the Allianz Core Income 7 Annuity is something to consider for someone that doesn't want to worry about market volatility, wants a guaranteed income stream and is happy with low single digit returns of roughly 2-3% which all indexed annuities will return. If you are happy with low investment returns and a guaranteed income stream, then this product may be acceptable for you. Index annuities should be thought of as a fixed income substitute and don't buy the dream that these will produce equity returns with no downside risk. Given the liquidity issues, you should limit your exposure to annuities to roughly 25% of your overall portfolio if you decide to buy one.

This product will work best for those that are in good health and have a family history of longevity. If you can live to your late 90s, then the guaranteed income stream will pay off handsomely. Just keep in mind that the income payments first come out of your principal and after your account value goes to zero, then you start earning a return. For most of us that live an average lifespan or even into your 80s, then a conservative portfolio of stocks and bonds will likely be a better choice. Be sure to evaluate how it fits into your entire investment strategy and how it will help you reach your financial goals.

In the end, all of the interest crediting options will pay roughly 2-4% over a full market cycle. Given current interest rates, I would suspect returns will be closer to 2% than 4%. If this gets too far out of line, Allianz will adjust the caps (to as low as 0.25%) and spreads (12% max) because they can't afford to pay more. The rider fee of 1.05% will also eat into your overall returns.

Don't buy into any sales pitch that is promising rates of return of 6% or more. It just isn't possible to generate high returns with no downside risk. If anyone promises you even 5%+ returns for this annuity, don't just walk away, run for the door and find a new advisor. For Allianz to pay 5% on this annuity, they would have to earn 8%+ on their own investment portfolio so they could pay you as well as their salespeople, marketing and overhead, not to mention to earn a profit themselves. Commissions are very lucrative for agents selling the Allianz Core 7 (5.5% in year one) so be sure that you make the right decision for you, not for their benefit.

Thanks for sticking with me on this incredibly long blog post. I learned a lot in my research process and I hope you are able to make a more informed investment decision because of it. Please don’t let your agent pressure you into a sale before you have made an informed decision. Since annuities lock you into a long term contract with stiff surrender fees, please be sure to take your time to make the best possible decision for you and your family.

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Have questions about this Annuity?

If you're considering this annuity and have additional questions, feel free to reach out. You can contact us via our secure contact form. We will answer your questions within 24 hours via email. No strings attached, just a little free help to point you in the right direction.

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If you have questions about this annuity, please share them in the comments section below or visit our secure page to submit a question.

 
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About the Author: Chris Wang

Chris Wang

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