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 EstateShield 10 Fixed Indexed Annuity. American Equity EstateShield 10 is a deferred, fixed-indexed annuity that may be a good option if you are looking to leave a legacy, lifetime income, the safety of principal, good indexing options, and complimentary popular riders. After extensive research and due diligence, I have provided an in-depth and unbiased analysis of this plan.
The review of the American Equity EstateShield 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 EstateShield 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 EstateShield Fixed Indexed Annuity, and then we will discuss each point in detail.
| Product Name | American Equity EstateShield |
|---|---|
Issuing Company | |
AM Best Rating | A- (4th of 13 ratings) |
Withdrawal Charge Period(s) | 9 and 10 years |
Maximum Issue Age | 75 Years |
Minimum Initial Purchase Amount | $5,000 |
Surrender Charge Schedule | Varies for different tenure policies |
Crediting Period and Strategies |
|
Plan Types |
|
Indexes |
|
Free Withdrawals | 10% of the annuity’s Accumulated Value; per year. |
Death Benefit | Enhanced Death Benefit: Upon the annuitant’s death, the beneficiary can either choose from (i) 125% of the surrender value or (ii) Premium received accumulated at 10%; not to exceed 250% of all premiums (minus any withdrawals, including withdrawal charges) |
Riders | Free Inbuilt Riders
|
Minimum Guaranteed Surrender Value | 87.5% of the premiums received, less any withdrawals, accumulated at the minimum guaranteed interest rate (2.50% at the time of writing this article) |
Surrender Value | Greater of Accumulated Value (less any withdrawal charges/MVA) and the Minimum Guaranteed Surrender Value |
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The American Equity EstateShield Fixed Indexed Annuity is almost identical for both policy tenures, except for the crediting strategies and surrender charge schedule. For ease of discussion and better clarity, we will discuss the American Equity EstateShield 10 Fixed Indexed Annuity for the rest of the article.
Product Policy
How does the American Equity EstateShield 10 policy work?
Any annuitant (maximum age at the time of policy issue: 75) can purchase the American Equity EstateShield 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 EstateShield 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 three strategies to choose from. The plan also allows the annuitant to choose from a fixed rate, making a total of 14 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 Credit Suisse 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 (which limits the true return earning potential).
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 EstateShield plan offers a low participation rate for the S&P 500 index, meaning that 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 (which limits the true return earning potential).
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 (which limits the true return earning potential).
6. 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.
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 2.50%.
Out of these indexes, the UBS Tech Edge Index might be a good index to choose from, as it offers a high participation rate, and back-tested returns are also higher compared to other indexes. However, I would always suggest going with the S&P 500 Index as it is a very transparent and popular index. Besides this, unlike the volatility control indexes that limit our return earning potential, the S&P 500 has no such limitations.
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:
- For Strategies with Participation: (Participation Rate % X Index Return)
- For Strategies with Caps: Index return over a given crediting period with a maximum potential of earning the cap rate
Let’s have a look at the American Equity EstateShield rate sheet (as of 1 Jan 2024) to understand how the earnings are determined.
The first thing to note is that we have six indexes, out of which the S&P 500 has three strategies, and other indexes have two point-to-point strategies, each with caps or participation rates. Additionally, we have a fixed rate strategy to choose from. All in, we get to choose from a total of 14 strategies (13 index-based and 1 fixed). The company displays three types of crediting strategies across these rates (Participation, Cap, and Fixed). The Participation rate (index allocation rate) and the strategy caps are the most important.
Let’s quickly go through the terminologies described by American Equity:
- Participation Rate (PR): 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%.
- 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.
- Fixed Account Rate: If you opt for a fixed account rate, you simply earn the fixed rates for a particular period specified by the company before your policy begins. These rates usually tend to be very low as compared to other fixed avenues, such as CDs and MYGAs, so you should avoid fixed rates in a general scenario. The 1-year fixed rate on this policy at the time of writing this article was 2.50%.
The rate sheet of the American Equity EstateShield Fixed Indexed Annuity is not lucrative, and it offers low cap and participation rates for the S&P 500 index, compared to other annuities. However, the USP of this annuity lies in lifetime income payments (and not income growth) and a complimentary set of riders that makes it an annuity worth looking at.
Riders
Riders are one of the main highlights of the American Equity EstateShield 10 Fixed Indexed Annuity. The EstateShield Fixed Indexed Annuity comes with free in-built riders that are automatically attached to the policy; Lifetime Income Benefit Rider (LIBR), Wellbeing Benefit, and Enhanced Death Benefit.
Lifetime Income Benefit Rider
The American Equity EstateShield 10 comes with a Free Lifetime Income Benefit Rider, which is the main highlight of this policy. We just discussed the rate sheet of the EstateShield policy and saw that the rates are low when compared to other policies. However, if you opt for Lifetime Income Payments, you get some added benefits that can increase your overall return.
Before understanding the added benefits of the Lifetime Income Benefit rider, let’s first understand the Benefits Account Value (BAV). When you purchase the American Equity EstateShield fixed indexed annuity and income rider, a Benefits Account Value (BAV) is set up for your rider. An Income Base Bonus provides an initial boost.
Your rider’s BAV (Benefit Account Value) is NOT the same as the annuity’s Accumulated Value. The Accumulated Value is available for withdrawal and is used to determine the Cash Surrender Value of your fixed-indexed annuity. On the other hand, think of the BAV as a value that is used just to calculate your Lifetime Income Withdrawal amount. This value has no cash value or surrender value and cannot be withdrawn in a lump sum.
However, A withdrawal from your Accumulated Value will reduce the rider’s BAV (and thus the amount of future Lifetime Income Withdrawals) proportionally. For example, withdrawing 10 percent from your Accumulated Value will reduce your BAV by 10 percent, too.
The Benefit Account Value is calculated as follows:
Initial Premium + Initial Bonus + Annual Interest Credits (with multiplier) - Withdrawals from your annuity
The BAV is grown in two ways:
- Initial Bonus: Starting year one, a BAV Bonus is applied to every dollar paid in the first 12 months. This is an immediate increase to your BAV, which is used to calculate lifetime income payments and benefits. The Initial Bonus percentage at the time of writing this article is 35%.
- BAV Multiplier: Each year after, any interest credited to the contract value is increased by the BAV Multiplier. Lifetime income withdrawals can begin after 10 years, or can be left to continue to grow for as long as you want. The BAV multiplier at the time of writing this article is 150%.
Accessing your Lifetime Income Withdrawal
Your Lifetime Income Withdrawal depends on your BAV at the time you start lifetime income withdrawals. Thus, the later you start your lifetime income withdrawals, the more your lifetime income withdrawal amount will be.
To calculate the Maximum Lifetime Income, the following formula is used:
BAV * Lifetime Income Withdrawal Percentage
Potential for Income Payment Increases: When lifetime income payments begin, payouts can continue to increase with the BAV Multiplier. The annual income payment amount will be increased by an amount equal to the current annual income payment multiplied by the BAV growth rate. This is something that not every similar type of annuity offers.
The lifetime income withdrawal percentage is based on how late you begin your lifetime income withdrawals and whether you opt for single-life or joint withdrawals. At the time of writing this article, the following Lifetime Income Withdrawal Percentage was applicable (for single life):
Wellbeing Benefit
A Wellbeing Benefit is automatically included with the Lifetime Income Benefit Rider (LIBR) at no fee. This allows increases in the income payment by an enhanced income payment factor (200% for single; 150% for joint) for a maximum of five years. This option is available based on the eligibility requirements below:
- An enhanced income waiting period of 10 years has elapsed
- The contract value is greater than zero
- Owner or spouse no longer able to perform two of six activities of daily living (ADLs)
The American Equity EstateShield 10 also comes with a Confinement and Terminal Illness Waiver. This no-fee benefit is automatically included for owners, providing them with a Confinement and Terminal Illness benefit.
Confinement Waiver: After the first contract year, an annuitant can withdraw up to 100% of the contract’s accumulated value if he is confined to a Qualified nursing home. No withdrawal charge or MVA applies if the owner qualifies for this benefit. Diagnosis must occur after the contract is issued, and written proof with supporting documentation is required from a qualified physician.
Terminal Illness Waiver: After the first contract year, an annuitant can withdraw up to 100% of the contract’s accumulated value if he is diagnosed with a terminal illness. No withdrawal charge or MVA applies if the owner qualifies for this benefit. 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 EstateShield 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% |
In case you need to surrender your policy, a Market Value Adjustment (MVA) will be applied to the portion of the withdrawal or surrender that exceeds the free withdrawal amount during the withdrawal charge period.
Contract/Administrative Charge
The American Equity EstateShield Fixed Indexed Annuity levies no annual contract or administrative fees.
What makes this product stand out?
The American Equity EstateShield 10 offers some of the features that not many fixed-indexed annuities offer. The ones that I like the most are:
- Free Riders: The American EstateShield 10 annuity offers complimentary Lifetime Income benefits and a Wellbeing rider. These riders offer a good value proposition, and other competing plans usually offer similar types of riders as paid riders only.
- 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.
- Option to Earn Enhanced Lifetime Income
- Multiple Lifetime Withdrawal Options
- Free Confinement and Terminal Illness Waiver
What I don’t like
Considering estate planning, this product is generally good on all fronts; still, 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 is an all-rounder policy that offers both growth and protection. As an all-rounder policy, 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 American Equity EstateShield 10 is one such annuity that helps you steadily grow your savings with less risk and provides you with an option to earn enhanced lifetime income. Through its complementary Lifetime Income Benefit and Wellbeing rider, it offers help in life’s accumulation, income, and estate planning stages of retirement.
If you are considering buying a Fixed Indexed Annuity that works best for estate planning and Guaranteed Lifetime Income, the American Equity EstateShield 10 FIA might be a decent product to look after. However, you must keep in mind that this annuity is more focused on estate planning and legacy and, thus, may not be the best suited for people who are exclusively looking for growth and accumulation, and your realistic return expectations should be average!
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.