5-minute article

A safer course in choppy markets: Annuities with principal protection from market volatility

Market downturns, such as the initial downstream effect of the coronavirus for example, may have caused some consumers to begin reaching out to financial professionals with concerns about how increasing market volatility could impact their retirement nest eggs. Financial professionals can help ease clients’ worries about outliving their money by checking their progress toward financial goals and ensuring that portfolio allocations are diversified and still in line with their risk tolerance. In anticipation of choppier markets, it may also be an appropriate time to educate consumers about a retirement strategy that offers a safer course, along with growth potential — fixed indexed annuities (FIAs).

Annuities remain a bit mysterious to consumers. Some hear the word “index” and immediately associate the product with direct exposure to equities. Or, investors who’ve shied away from variable annuities might overcorrect to believing that only CDs and bonds are “safe” options — without realizing that FIAs are not securities. Lack of understanding can prevent consumers from utilizing the unique traits of fixed indexed annuities for retirement planning.

Consumers should understand that FIAs are insurance contracts that come with guarantees and have no direct exposure to the stock market.

With an FIA, growth is benchmarked to a stock market index such as the S&P 500®. “One of the biggest misconceptions is that if the contract owner elects to have a portion of their premiums allocated to the S&P 500® annual point-to-point index, that their premiums are invested directly in the equities which comprise the S&P 500®. They are not,” says Rod Mims, senior vice president of national sales at Athene USA. “Rather, premiums are invested in the general account of the insurance company. The contract owner’s performance on those premiums is determined by interest credits based in part on any positive change in the index during the crediting period, typically 12 or 24 months.”

Another mistaken belief some consumers may harbor is that if the benchmark index goes down in a given year, the FIA contract owner will have a negative return. In fact, they will simply have a zero return. With fixed indexed annuities, the consumer can’t lose their principal to market downturns. “The policyowner’s premiums are held to a zero-return floor,” says Mims.

Fixed indexed annuities come in many models and can provide solutions for a wide variety of retirement conundrums when used as part of a well-diversified portfolio. Each year, the customer is credited with a set percentage, known as the participation rate, of any stock market gain. For example, if the participation rate is 50 percent and the S&P 500® increases by 14 percent, the customer would receive a 7 percent credit for that year. Meanwhile, the risk of a market drop is transferred to the insurance company, and the principal is guaranteed to be protected from market losses. Again, in a down year for the stock market, “They would be credited with zero return — but nothing lower than zero — for that time period.”

FIAs can give risk-averse consumers a higher level of comfort and security as they progress toward long-term retirement goals.

Because they are insulated from market volatility, the consumer may be better able to withstand choppy periods with equanimity, knowing they will partake in a portion of eventual market gains. “Often the guarantees provide the saver with the confidence to keep their money in the annuity during both up and down markets,” says Mims.

Fixed indexed annuities have an array of built-in features that can be valuable for couples, families, legacies and more. Consumers, with help from their financial professionals, can select features such as guaranteed fixed-rate accounts, guaranteed death benefits, index performance that never goes below zero, a minimum interest credit rate, guaranteed liquidity features, and guaranteed lifetime income streams which do not require annuitization of the contract.

As in all retirement planning, one size doesn’t fit all. When considering FIAs for a retirement portfolio, financial professionals must take the time to fully understand the consumer’s goals, level of accumulated assets and other sources of guaranteed lifetime income, such as Social Security benefits, pensions, real estate income or income from other assets. Financial professionals should consider the client’s projected income tax bracket for the year they expect to take money out of the contract. If the consumer wishes to be able to withdraw funds prior to age 59 ½, financial professionals should also factor in the 10 percent federal tax penalty that applies to any annuity distribution just as it does to IRA distributions.

Financial professionals can provide a wonderful service when they educate consumers about fixed indexed annuities, including at times, the ability to make retirement decisions with confidence.

“If one has the benefit of a time horizon of at least five years or greater, the concept of time-value of money can be a powerful driver of performance and thus, the opportunity for better return performance of the annuity,” says Mims. Conservative individuals may reap higher returns over the long term if they allocate a portion of their portfolios to fixed indexed annuities rather than bonds or CDs. In addition, risk-averse consumers, after securing their basic retirement needs with lifetime income streams, may feel freer to consider a wider range of options for the remainder of their portfolios.

Financial professionals may need support in order to fully understand and explain the features and benefits to their clients. It can be helpful to partner with insurance carriers who can supply consumer-oriented educational materials to use when working with clients and answering their questions.

This information is brought to you by Athene — where innovative annuity solutions are powered by unconventional thinking.