Introduction
Fixed Index Annuities are contracts between the annuitant and an insurance company in which the insurance company promises to credit interest based on the performance of a certain stock market index, such as the S&P 500. Fixed Index Annuities have an inbuilt capital protection feature, so your principal will remain safe even if the index goes down.
Annuities are complex products, and many advisors try to missell them without properly understanding the buyer’s needs. Thus, you must educate yourself on these products and not solely depend upon the annuity agent’s high-pressure sales pitch.
In this article, we will discuss the American Equity AssetShield Fixed Indexed Annuity in depth. It is one of the most popular annuities of American Equity. I have provided an in-depth and unbiased analysis of this plan after extensive research and due diligence. The review of the American Equity AssetShield Fixed Indexed Annuity will be broken into multiple subcategories:
- Product Description
- Product Policy
- Rates and Costs
- Riders
- What Makes this Product Stand Out?
- What I Don’t Like
- Company Details
- Conclusion
Product Description
The American Equity AssetShield is a Fixed Indexed Annuity (FIA) plan that offers the annuitant (annuity investor) an opportunity to earn a market index-linked return without having to incur the risk of market downside. It is a suitable plan for retirees or people who are approaching retirement and aim to grow and protect their retirement savings. This plan is also suitable for people who are looking for guaranteed lifetime income or plan to leave a legacy for their loved ones, in addition to protecting and growing their retirement savings.
Let’s have a look at the high-level fine print of American Equity AssetShield Fixed Indexed Annuity, and then we will discuss each point in detail.
| Product Name | AssetShield |
|---|---|
Issuing Company | |
AM Best Rating | A- (4th of 13 ratings) |
Tenure | 5, 7, 10 years |
Maximum Issue Age | 85 Years (80 Years for the 10-year policy) |
Minimum Initial Purchase Amount | $5,000 |
Surrender Charge Schedule | Varies for different tenure policies |
Crediting Period |
|
Plan Types |
|
Indexes |
|
Free Withdrawals | 10% after the first completed contract year |
Death Benefit | The greater of the Contract Value or the Minimum Guaranteed Surrender Value |
Free Rider(s) |
|
Optional Riders | The annuitant can choose any one of the following:
|
Minimum Guaranteed Surrender Value (MGSY) | 87.5% |
The American Equity AssetShield policy is almost identical for all policy tenures, except the crediting period and surrender charge schedule. For ease of discussion and better clarity, we will discuss the American Equity AssetShield 10 policy for the rest of the article.
Product Policy
How does the American Equity AssetShield 10 policy work?
Any annuitant (maximum age at the time of policy issue: 80) can purchase the American Equity AssetShield 10 policy with a minimum initial purchase amount of $5,000, and in return, he will earn market index returns (calculated through a formula that we will discuss shortly), credited as per the chosen crediting period. Apart from the regular crediting period, there are various events that may trigger earnings credit: On-free withdrawals, for a long-term care event, terminal illness or injury event, or when a death benefit is payable.
The American Equity AssetShield 10 offers the annuitant the ability to choose from one or more of the six indexes to determine his earnings crediting formula. Five of these indexes have two strategies each, and the S&P 500 index has four strategies to choose from (making a total of 14 indexed strategy options). The minimum allocation for each strategy is $1,000. We will discuss each available index briefly:
The BofA Destinations Index uses a rules-based approach to determine a balanced risk allocation between three asset classes: US equities, US treasuries, and gold. Next, aiming to adapt to current markets, the Index adjusts the weights away from recently underperforming assets toward assets that have recently outperformed. The Index combines two classic asset allocation methods to balance risk, then seek returns. The BofA Destinations Index was created in June 2020 and targets a 5% annualized realized volatility.
The UBS Tech Edge Index is a rules-based multi-asset index that offers exposure to four equity ETFs known for their focus on innovation and technology. The Index implements a strategy that combines exposure to U.S. equities and fixed income and seeks to adapt to various market conditions. The Index also applies a bespoke volatility control mechanism designed by Salt Financial to identify changing market conditions using intraday data. The UBS Tech Edge Index was created in January 2021 and targets a 4.5% annualized realized volatility.
The S&P 500 index is one of the most popular and oldest indexes in the world. It tracks 500 large-cap publicly traded stocks listed in the United States. It is a reliable index and has often succeeded in the test of time. It is very important to note that the American Equity AssetShield plan offers a low participation rate for the S&P 500 index. You will be credited only a small part of the S&P 500 return to your annuity. These rates change frequently; I will discuss the rates in detail shortly.
The S&P 500 Dividend Aristocrats measure the performance of companies within the S&P 500 that have followed a policy of consistently increasing dividends every year for at least 25 years. Constituents are equal-weighted every quarter, with the qualifying universe reviewed once a year in January. The S&P 500 Dividend Aristocrats Index was created in August 2010 and targets a 5% annualized realized volatility.
The SG Global Sentiment Index uses a simple allocation methodology that responds to dynamic markets using analytics that assesses whether a market is in the growth, intermediate, or shrinking phase. Plus, a built-in volatility control feature helps manage exposure in turbulent markets. This index provides exposure to equities and bonds from the US, Germany, Japan, and China. The SG Global Sentiment Index was created in December 2020 and targets a maximum of 5% annualized realized volatility.
The BlackRock Adaptive U.S. Equity 5% Index aims to provide exposure to the iShares Core S&P 500 ETF while adhering to a specified Target Volatility of 5%. To achieve this, the Index integrates Fixed Income U.S. Treasury iShares® ETFs and a cash component. While this strategy can cushion the impact of market declines, it also constrains the potential for upside gains.
In my opinion, the UBS Tech Edge Index is an ideal index to choose from, as it offers a high participation rate, and back-tested returns are also higher compared to other indexes.
Note: In addition to allocating the funds in the following indexes, the annuitant also has the option to allocate funds at a fixed interest. These Fixed Rates change from time to time. The Fixed Value Rate at the time of writing this article was 4%.
Rates and Costs
The earnings crediting formula
The earnings crediting formula is the most important part of this annuity discussion. It is important to know that we don’t simply get the index return credited to our annuity. There are a few rates and caps that the company has in place that affect our earnings. These rates tend to change over time, and the updated rates can always be checked on the company’s website.
The formula to calculate the earnings credited is:
(Participation Rate % X Index Return) - (Annual Fee* X Crediting Period)
*Annual Fee is applicable in the case of a Performance Rate Rider (PRR). It will be discussed shortly.
Before understanding the earnings crediting strategy, let us look at the two optional riders that American Equity AssetShield annuity offers.
- Rate Integrity Rider (RIR): This rider allows for a waiver of surrender charges upon termination of the annuity contract. During the waiver election period, American Equity will waive surrender charges if we declare a cap or participation rate for any crediting strategy included in the Rate Integrity Rider that is less than or equal to the surrender charge waiver rate. The surrender charge waiver rate for each crediting strategy is determined at the date of purchase.
- Performance Rate Rider (PRR): Performance Rate Rider offers more options for magnified growth potential. exchange for a fee, this rider provides the opportunity to increase the cap, participation rate, or replacement rate on elected index-linked crediting strategies. The rider fee is locked in for the surrender charge schedule and deducted on the last day of each term.
Now that we are clear about the two riders it offers, let us quickly go through all the rates and caps that American Equity AssetShield levies.
Let’s have a look at the American Equity AssetShield 10 rate sheet (as of 02/22/2024) to understand how the earnings are determined.
The first thing to note is that we have six indexes. Five indexes have 2 strategies each, and the S&P 500 index has 4 strategies. All in all, it gives us the option to allocate our contract to a total of 14 indexed strategies.
Let’s quickly go through the terminologies described by American Equity:
- Participation rate (PR): Participation rate describes the annuitant’s participation percentage in a return of an index. For example, suppose the participation rate is 60%, and the index returned 10% over the agreed time. In that case, the annuitant will be eligible for only 60% of the return, i.e., 6%.
- Cap rates: This refers to the rate at which your interest-earning capacity is capped. For example, if an index returns 12% but the contract’s cap rate is 6%, In this situation, the annuitant will be eligible for an interest credit of 6% only. It doesn’t matter how much the index goes above the cap rate; the maximum interest that can be earned is the cap rate.
- Replacement Rate (RR): Replacement Rate is only applicable for monthly point-to-point strategies. The three highest monthly index changes are replaced with the replacement rate declared at the beginning of each contract year. We can think of it as a partial cap that reduces your capacity to earn high index returns.
- Rate Integrity Rider Rate (RIRR): It is basically the cost of opting for the Rate Integrity Rider (discussed earlier). American Equity doesn’t directly levy a fee for opting for this rider, but the annuitant has to settle with lower participation or cap rate.
- Performance Rate Rider Rate (PRR): As discussed, PRR helps an annuitant earn magnified returns, but, in return, he has to pay a fixed fee specified at the beginning of the contract.
- Fixed Value Rate: In addition to allocating the funds in the following indexes, the annuitant also has the option to allocate funds at a fixed interest. These Fixed Rates change from time to time. The Fixed Value Rate at the time of writing this article was 4%.
Now that we know all of these terms, it becomes very easy for us to understand the earnings crediting method. The first 11 strategies have a participation rate-based cap; the next 2 strategies have an earnings rate cap in place, and the last strategy doesn’t have a participation rate or cap in place but a replacement rate that limits your maximum earnings potential. You must consult a trusted financial advisor to know what indexes and strategies suit you best.
Surrender Charge
Should your needs change unexpectedly, and you need to take an excess withdrawal (a withdrawal that is above the free withdrawal amount available in a given contract year) you may be entitled to access additional monies; although certain charges and penalties may apply. Any amount withdrawn in excess of the remaining free withdrawal amount is subject to a Surrender Charge. Below is the Surrender Charge schedule for American Equity AssetShield 10.
| Completed Contract Years | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10+ |
|---|---|---|---|---|---|---|---|---|---|---|---|
Surrender Charge % | 9.2% | 9% | 8% | 7% | 6% | 5% | 4% | 3% | 2% | 1% | 0% |
In case you need to surrender your policy, your contract value will be calculated assuming a Minimum Guaranteed Interest Rate (MGIR) of 1% for the period you held the policy.
Note that this surrender charge schedule is only valid for the American Equity AssetShield 10 product for select states. For complete details about each state, you may visit the product’s rate card.
The surrender charge schedule is different for the different tenures of annuities. For a quick comparison of surrender charges across different American Equity products, visit their fixed-indexed annuities product page.
The surrender charge of the American Equity AssetShield fixed-indexed annuity is in line with all the other annuity issuers.
Contract/Administrative Charge
The American Equity AssetShield levies no annual contract or administrative fees.
What makes this product stand out?
The American Equity AssetShield 10 offers some of the features that not many fixed-indexed annuities offer. The ones that I like the most are:
Free Enhanced Benefit Rider: This no-fee rider is automatically included for owners under age 75 at issue and includes both a Qualified Nursing Care and Terminal Illness Benefit:
- Qualified Nursing Care Benefit - After the first contract year, one additional free withdrawal of up to 100% of the contract value is allowed if the owner is confined in a qualified care facility for a minimum of 90 days. Confinement must begin after the contract issue date and written proof is required from both the qualified care facility and recommending physician.
- Terminal Illness Benefit - After the first contract year, one additional free withdrawal of up to 100% of the contract value is allowed if the owner is diagnosed with a terminal illness. Diagnosis must occur after the contract is issued and written proof with supporting documentation is required from a qualified physician.
- Optional Rider to increase potential returns: The Performance Rate rider helps to Increase cap, participation rate, or replacement rate on available strategies for more accumulation options that can align with a wide variety of goals. However, one must keep in mind that it comes with a fixed fee, which may vary according to the strategy selected.
- Minimum Guaranteed Income Rate: In case you need to surrender your policy, your contract value will be calculated assuming a Minimum Guaranteed Interest Rate (MGIR) of 1% for the period you held the policy. This rate is generally higher than other policies that offer ~0.50-0.75% MGIR.
- Low minimum purchase amount: The minimum purchase amount for this annuity is low at just $5,000. Many of the popular annuities available in the market require a high minimum purchase amount of anywhere between $10,000 and $25,000. The low minimum purchase requirement enables even small investors to purchase annuity products.
What I don’t like
This product is decent on all fronts, but there are some features that I don’t like about this annuity.
- Low Participation Rate on the S&P 500 Index - The rate sheet mentions that the participation rate on all the strategies of the S&P 500 Index is very low. Even with the low participation rate, the company still applies a high fee when opting for riders. The S&P 500 is the most popular index in the world, and the annuitant should be given a decent opportunity to participate in the S&P 500 index.
- Above-average optional rider cost - American Equity doesn’t outright charge for the additional riders. Still, it imposes high participation and cap restrictions if you wish to opt for a rider.
- A limited number of riders to choose from - American Equity doesn’t offer any enhanced living or death benefit riders, so it may not be useful for people who are sure that they will need a guaranteed income stream from this annuity.
- No free withdrawal in the first year - You must keep this in mind while purchasing the American Equity AssetShield annuity.
Company Details
You must always keep in mind that, unlike CDs, annuities are not guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other federal insurance agency. An annuity's "guarantee" is only as strong as the insurance company that issues the annuity, so it is always important to assess the issuing company before buying an annuity.
American Equity Investment Life Insurance Company
American Equity Investment Life Insurance Company has been in the business since 1995. It has been a major player in the fixed-indexed annuity market for many years and has been regularly in the top ten Fixed Indexed Annuity Sales.
It is rated as follows by the rating agencies:
| Rating Agency | Rating |
|---|---|
AM Best | A- (4th of 13 ratings) |
Fitch | A- (7th of 19 ratings) |
S&P | A (6th of 20 ratings) |
American Equity has managed to maintain decent ratings for many years. It is considered to be strong and stable financially. As of year-end 2023, some of the other financial highlights for American Equity include its:
- $7.39 billion in total sales / direct written premium
- $125 million in net operating income
- $59.83 billion in total assets
Thus, going by the operating history and financial numbers, we can safely gauge that you can trust your savings with American Equity.
Conclusion
With the advancements in healthcare and technology, the average American today lives longer than ever. So, it’s very important to have a stream of income that can grow safely and steadily, and that has the ability to provide a fixed guaranteed income during the retirement years. This not only helps you mitigate the risk of outliving your income but also ensures that you continue to live a decent life even in your retirement.
The American Equity AssetShield is one such annuity that helps you grow your savings with much less risk. Through its Fixed Income Annuity, it offers principal protection or the opportunity to participate risk-free in the market index, provides a stream of guaranteed income, or even provides legacy planning. If you are considering buying a Fixed Indexed Annuity that is ideal for legacy planning, the American Equity AssetShield might interest you.
We understand that choosing the right annuity can be a complex decision, influenced by a myriad of factors such as market conditions, individual financial goals, and evolving life circumstances. To better serve you in this critical decision-making process, we regularly conduct in-depth reviews of various annuity products, examining features, costs, and potential benefits. Delve deeper into our extensive reviews.