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.
This article discusses an in-depth review of the American Equity BalanceShield 10 Fixed Indexed Annuity. The American Equity BalanceShield 10 is a deferred, fixed-indexed annuity that may be a suitable choice for risk-averse individuals seeking to preserve principal safety, secure legacy benefits, and access straightforward indexing options. It offers the added benefit of guaranteed growth, even in the event of consistent market underperformance. After extensive research and due diligence, I have provided an in-depth and unbiased analysis of this plan.
The review of the American Equity BalanceShield 10 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 BalanceShield 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. This might be a suitable plan for 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 BalanceShield Fixed Indexed Annuity, and then we will discuss each point in detail.
| Product Name | American Equity BalanceShield |
|---|---|
Issuing Company | |
AM Best Rating | A- (4th of 13 ratings) |
Withdrawal Charge Period(s) | 10 years |
Maximum Issue Age | 80 Years |
Minimum Initial Purchase Amount | $10,000 |
Surrender Charge Schedule | Varies for different tenure policies |
Crediting Period and Strategies |
|
Plan Types |
|
Indexes |
|
Additional Benefits | Balanced Interest Strategy to ensure guaranteed growth, even in the event of consistent market underperformance |
Free Withdrawals | 10% of the annuity’s Accumulated Value; per year |
Death Benefit | The death benefit is paid to the surviving joint owner. If there is no surviving joint owner, the death benefit is paid to the named beneficiary(ies) with no surrender charges, calculated with Gains-to-Date |
Free Riders | Qualified Nursing Care and Terminal Illness Benefits |
Minimum Guaranteed Floor Value | The initial floor is 1% and is set for the withdrawal charge period. The guaranteed minimum floor will never be less than 0%. |
Product Policy
How does the American Equity BalanceShield 10 policy work?
Any annuitant (maximum age at the time of policy issue: 80) can purchase the BalanceShield 10 fixed indexed annuity with a minimum initial purchase amount of $10,000, and in return, they 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 or terminal illness or injury event, or when a death benefit is payable. All these interest credits are credited to a bucket called “Account Value.” This bucket is your annuity account balance, and all your withdrawals take place from it.
The American Equity BalanceShield 10 allows the annuitant to select from among three indices (S&P 500 Index, Blackrock Adaptive US Equity 5% Index, S&P 500® Dividend Aristocrats® Daily Risk Control 5% Excess Return Index) to establish their earnings crediting formula. Each of these indices offers two strategies. Additionally, the plan permits the annuitant to opt for a fixed rate, resulting in a total of 7 strategy options. We will discuss each available index briefly:
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.
2. BlackRock Adaptive US Equity 5% Index
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.
3. S&P 500 Dividend Aristocrats Daily Risk Control 5% Excess Return Index
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.
Note: It's important to note that, like other Fixed Indexed Annuities, the American Equity BalanceShield 10 Fixed Indexed Annuity includes participation rates, spreads, and boosts for these indices. This means you will only receive a portion of the index return credited to your annuity. These rates are subject to frequent changes, which I will discuss in greater detail shortly.
Also, it is important to note that except for the S&P 500 Index, both the other indexes have a volatility control mechanism in place, which limits the overall return earning capacity of the index.
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 4.05%.
I recommend the S&P 500 Index due to its transparency and widespread recognition. Unlike volatility-controlled indices, which cap your upside potential, the S&P 500 imposes no such constraints. I will discuss this in detail in the next section.
Rates and Costs
The earnings crediting formula
The earnings crediting formula is the most important part of this annuity discussion. Any premium that you put into your annuity goes into your contract value. This contract value grows over time as per your chosen index strategy. It is important to know that you don’t simply get the index return credited to our annuity. There are a few rates that the company has in place that affect our earnings.
Let’s have a look at the American Equity BalanceShield rate sheet (as of July 2024) to understand how the earnings are determined.
BalanceShield 10 gives you multiple one- and two-year index-linked strategy options that offer initial guaranteed interest credits—the floor—along with the opportunity to capture additional interest credits from index growth through the Strategy Gain Percentage, based on the Core & More steps described below. You will receive interest based on either the floor or the Strategy Gain Percentage, whichever is higher.
The Balanced Interest Strategy offers the better of two approaches: the guaranteed Floor, which provides a minimum level of interest credit, or the Core and More strategy, which calculates interest credits based on index performance, participation rates, and an interest boost. At the end of the term, you receive the higher of the two, ensuring a balance between guaranteed growth and the potential for higher returns through index-linked strategies.
The 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%.
Spreads refer to a deduction applied to the index return before calculating the interest credited to your account. It's essentially a cost or margin that reduces the overall return from the index, which is subtracted after the participation rate is applied to the index return.
The boost refers to an additional interest enhancement that is applied after the core index return is calculated. This boost increases the overall interest credited to your account, providing an extra uplift to the returns generated through the index-linked strategy. The Interest Boost is guaranteed for the length of the strategy term, amplifying the final credited amount.
Let's break down how the Balanced Interest Strategy works using a simple example:
Suppose you invest $100,000 in a fixed indexed annuity with the Balanced Interest Strategy. You have two potential outcomes at the end of the term: the Floor or the Core and More strategy.
Scenario 1: The Floor
The annuity has a 1% Floor, meaning your interest will never be lower than 1%, even if the market performs poorly. At the end of a one-year term, the interest credited to your account would be:
$100,000 × 1% (Floor) = $1,000
In this case, you’re guaranteed a minimum of $1,000 in interest, regardless of market performance.
Scenario 2: Core and More Strategy
Now, let’s assume the market performs well, and the Core return is calculated based on the steps outlined:
Index Return: Let's assume the index returned 8% over the term.
Participation Rate: The annuity applies a participation rate of 50%, so you earn 50% of the index return. That would be:
8% × 50% = 4%
Spread: Let’s assume there’s a 1% spread. This amount is subtracted from the 4% participation return, so:
4% – 1% = 3%
Next, the More strategy adds an Interest Boost. Suppose the boost is 50%, which would further increase your credit:
3% × (1 + 50%) = 4.50%
In this scenario, your interest would be:
$100,000 × 4.50% = $4,500
Final Comparison:
Floor Interest: $1,000
Core and More Interest: $4,500
Since the Balanced Interest Strategy gives you the better of the two, you would receive $4,500 in interest from the Core and More strategy in this case, as it is higher than the Floor. This ensures you benefit from either a guaranteed minimum or a higher potential return based on market performance.
Protect Your Gains with the Index Lock Feature
The Index Lock feature allows you to lock in an index price at any point during the strategy term, giving you added control and protection against market downturns. Once you choose to lock in the index price, it remains fixed until the end of the strategy term, regardless of future market fluctuations.
How It Works:
You can use the Index Lock option once per strategy term, enabling you to secure a favorable index price when you believe the market is at a high point or when you want to avoid potential downturns.
The locked index price is then used to calculate any interest credits at the end of the strategy term, as well as any Gains-to-Date Credits during the term.
This feature provides flexibility and peace of mind by ensuring that your returns are protected from any market drops that may occur after the index is locked.
For example, as shown in the chart, if you decide to lock in the index price during month 7 when the market is performing well, that price will carry forward to the end of the strategy term (month 12). Even if the market experiences a downturn after month 7, your interest credit will be calculated based on the locked-in index price, ensuring that your gains are protected.
In essence, the Index Lock feature provides an opportunity to capture market gains while mitigating risks from future volatility.
Riders
The American Equity BalanceShield 10 is a plain-vanilla annuity that does not offer any optional paid riders. In my opinion, this actually appeals to many people who don’t understand or do not want to dive deep into the complex methodologies the riders often come up with. However, as with most annuities, the BalanceShield 10 has free in-built nursing home and terminal illness waivers.
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 the 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.
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 BalanceShield 10 Fixed Indexed Annuity.
| Completed Contract Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11+ |
|---|---|---|---|---|---|---|---|---|---|---|---|
Surrender Charge % | 9.2% | 9% | 8% | 7% | 6% | 5% | 4% | 3% | 2% | 1% | 0% |
Contract Value, the Gains-to-Date Credits are calculated using a prorated Strategy Gain Percentage. Additionally, if the prorated Floor percentage is higher than the Strategy Gain Percentage, the Floor will be applied to ensure you receive the maximum possible credit. These credits are applied immediately to your strategy value following the withdrawal, ensuring that your account continues to benefit from interest even when you access a portion of your funds. This feature helps you manage liquidity needs without sacrificing potential interest earnings.
Contract/Administrative Charge
The American Equity BalanceShield Fixed Indexed Annuity levies no annual contract or administrative fees.
What makes this product stand out?
The American Equity BalanceShield 10 offers some of the features that not many fixed-indexed annuities offer. The ones that I like the most are:
Balanced Interest Strategy: This strategy ensures you receive the better of two crediting methods: the guaranteed floor or the Core & More strategy. This offers the security of a minimum guaranteed interest rate along with the potential for higher returns based on market performance, providing a balance between protection and growth.
Index Lock: The Index Lock feature allows you to lock in a favorable index price at any point during the strategy term. This protects your gains by ensuring that even if the market drops after locking in, your interest credit is based on the locked price, providing enhanced control and protection against downturns.
Gains-to-Date Credits: This feature allows you to withdraw up to 10% of your Contract Value each year before the end of the strategy term without losing the interest accrued. The Gains-to-Date Credits are applied immediately after the withdrawal, ensuring you continue to benefit from interest growth while meeting liquidity needs.
Free Nursing Home Confinement and Terminal Illness Waiver
No annual contract, mortality & expense, or administrative fees
What I don’t like
There are some features that I don’t like about this annuity.
Low Cap Rate on the S&P 500 Index - The rate sheet mentions that the cap rate on all the strategies of the S&P 500 Index is very low. 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.
Average Realistic Return Expectations: You might have known by now that this annuity focuses on balanced income growth. Thus, the realistic return expectations should be average. It is not the best policy for someone who is looking only for growth and accumulation.
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 have the ability to provide a 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 BalanceShield 10 annuity offers a well-rounded combination of growth potential, principal protection, and flexibility, making it a strong choice for risk-averse investors. With features like the Balanced Interest Strategy, which balances guaranteed returns with market-based growth, the Index Lock for added control in volatile markets, and Gains-to-Date Credits that allow for liquidity without sacrificing interest, this product stands out for its ability to meet both short-term needs and long-term financial goals. Overall, the BalanceShield 10 provides a secure and adaptable solution for those seeking to preserve wealth while still capturing potential market upside.
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. To delve deeper into our extensive reviews, click here.