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.
Annuity Review: Allianz Index Advantage Annuity
Maximum age for initial purchase: 80
Minimum initial premium: $10,000
Fee: 1.25 percent
NOTE: Runnymede offers a commission-free version of this product that carries a fee of 0.75%. This is a cost savings that will increase your return. Read more and contact us for more information.
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.
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%).
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):
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%.
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.
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.
Runnymede offers a commission-free version of this product that carries a fee of 0.75%. Most agents are selling this product with an annual fee of 1.25%.
Purchasing the same product with 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. Contact us for information.
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 firstname.lastname@example.org 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.