allianz index advantage variable annuity review

An impartial review of the Allianz Index Advantage Variable Annuity

,The 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 salespeople trying to persuade you to make a purchase.

Today I will dig deep into the Allianz Index Advantage Annuity. This annuity is the insurance industry's newest innovation, RILAs or registered indexed-linked annuities aka buffer annuities. These annuities appeal to investors who are risk averse but also need growth - some protection on the downside in exchange for a cap on a stock index's performance. Sales of RILAs rose 38% to $4.9 billion in the first quarter of 2020.

The Allianz Index Advantage Annuity is listed in Barron's best RILAs with downside protection with stock-like returns. 

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. While the negative attention led to a change for the better among the carriers, indexed annuities are still complex and difficult to truly understand.

It is of the utmost importance to make an informed decision. I have dealt with too many clients who 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 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. 

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

It is the 5th largest money manager in the world. Allianz in North America includes PIMCO and Allianz Global Investors. 

Allianz Life receives solid ratings from all the leading rating agencies as of 2020.

allianz rating

Annuity Review: Allianz Index Advantage Annuity

Maximum age for initial purchase: 80

Minimum initial premium: $10,000

Website: www.allianzlife.com

Fee: 1.25 percent

NOTE: Runnymede offers this product at a discounted fee of 0.75 percent. It's the same product but with a cost savings that will increase your return.

 

Beware of Surrender Fees

Surrender charges and period for this annuity are the typical of most annuities. The contract includes a 7-year withdrawal charge schedule.

After the 1st contract year, you may withdraw 10% each year without surrender fees. However if you are under age 59.5, you are subject to a 10% IRS tax penalty as well as income taxes. 

allianz index advantage surrender

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 prospectus

 Allianz highlights these points:

  • Buffered downside protection
  • Potential uncapped growth
  • Tax deferred growth

How will you likely be pitched this annuity?

This indexed variable annuity (also called a buffered annuity) will likely be packaged around two main components:

1. Uncapped potential growth of the S&P 500; or high caps on other indexes;

2. Buffered protection of 20% for a 3 year period; or 10% buffer on 1 year periods.

This product can make sense for someone who is looking for growth but also concerned about downside risk. This annuity can provide uncapped upside potential in the S&P and also gives 20% buffered protection for 3 year periods. I will go into this in more detail in a bit.

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

Interest Crediting Options

The most popular option for this product is the 3-year term strategy. This offers 20% downside protection and either uncapped growth of the S&P 500 or 55% cap on the Russell 2000.

The downside protection or buffer is calculated every 3 years. For example, at the end of 3-years, if the S&P 500 has gained 50% in price, your account value has increased by 50% minus the annual fee. However, if the index dropped by 10% over that period, you would lose nothing as it is within the 20% buffer. If the S&P loses 25% in the 3 years, then you would have a loss of just 5% (25% - 20% = 5%).

 allianz index advantage 3 year strategy

The rest of the strategies are one-year term strategies.

The first is similar to the 3-year term; but in a one-year term structure, you have more index choices: the Nasdaq 100, iShares Emerging markets, and the Euro Stoxx-50. Here is the current cap structure (9/8/20-10/5/20):

allianz index advantage rates

If you take the performance strategy in a 1-year term, your cap on the S&P 500 is 20% and your buffer is 10%. This gives some downside protection and a very sizable cap as the S&P 500 isn't typically up more than 20% in one year.

The Precision strategy is also known as a trigger strategy. If the return in the index is zero or positive, you earn "Precision rate." Referencing the rate table above, if the S&P returns 1% at the end of your contract year, you would earn 12.7% in your contract for that year. Your downside is buffered by 10%.

allianz index advantage precision strategy

The Index Guard strategy offers downside protection in a different way. You are responsible for up to a 10% loss in the index but you can't lose any more than that. However, your upside is also capped at lower levels as you can see in the table above.

allianz index advantage guard strategy

The least popular strategy is the Protection strategy. This is essentially a bond alternative offering 2.5-2.6% caps with 100% downside protection. You can find this option in many other fixed index annuities but you can get better cap rates. There are likely better annuities if you select this option. (Our advisors can help you compare products.)

Who should buy this product?

In summary, the Allianz Index Advantage Variable Annuity is something to consider for someone who is looking to grow their assets but also looking for some downside protection. If this is you, then this annuity may be the right fit.

If you're interested in this product, Runnymede offers it at a discounted fee of 0.75% per year. Most agents are selling this product with an annual fee of 1.25%.

Purchasing the same product at a lower fee means more money for you over the life of the contract. On a $250,000 investment, you could save at least $1,250 per year.

Be sure to evaluate how it fits into your entire investment strategy and how it will help you reach your financial goals. Feel free to reach out to us if you need more details.

Have questions about this Annuity?

If you're considering this annuity, have additional questions, or want to buy this annuity at a discount, feel free to reach out. You can email me (Chris) directly at cwang@runnymede.com or via our secure contact form. We will answer your questions within 24 hours via email. No strings attached. We are happy to point you in the right direction.

 
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About the Author: Chris Wang

Chris Wang

IMPORTANT DISCLOSURE INFORMATION 

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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