How does the American Equity FlexShield 10 Fixed Indexed Annuity work?

Any annuitant (maximum age at the time of policy issue: 80) can purchase the American Equity FlexShield 10 Fixed Indexed Annuity with a minimum initial purchase amount of $5,000, and in return, he will earn market index interest credits (calculated through a formula that we will discuss shortly), credited as per the chosen crediting period. Apart from the regular crediting period, various events 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.

As soon as the annuitant makes a premium payment, a “Contract Value Account” is created, equal to your total premium paid plus any interest earned from your chosen allocations, less withdrawals, charges for any optional riders you select, any applicable allocation charges and surrender charges, and adjusted by any Market Value Adjustments (MVAs).

Interest Indexing Options

The American Equity FlexShield 10 allows the annuitant to select from among five indices to establish their earnings crediting formula. Each of these indices offers one strategy. Additionally, the plan permits the annuitant to opt for a fixed rate, resulting in a total of 6 strategy options. We will discuss each available index briefly:

S&P 500 Index: 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.
BofA Destinations Index: The 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. Again, the targeted 
UBS Tech Edge Index: 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 Credit Suisse Tech Edge Index was created in January 2021 and targets a 4.5% annualized realized volatility.
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.
SG Global Sentiment Index:  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. 

Note: It's important to note that, like other Fixed Indexed Annuities, the American Equity FlexShield 10 Fixed Indexed Annuity includes cap rates and participation rates 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, all 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 tend to change from time to time. The Fixed Value Rate at the time of writing this article was 3.50%.

Rates and Costs associated with the American Equity FlexShield Annuity

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.

Let’s have a look at the American Equity FlexShield rate sheet (as of 1 Jan 2024) to understand how the earnings are determined.

The first thing to note is that we have five indexes, 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 six strategies (five index-based and one 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: It means at what rate your interest-earning capacity is capped. For example, if an index returned 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 3.5%. 

Floor Limits

The FlexShield 10 Fixed Indexed Annuity features a distinctive aspect known as the Floor Limit. This limit is the maximum performance floor applied during a contract year. The Floor Limit sets FlexShield 10 apart from other fixed-indexed annuities that offer zero downside. In typical zero-downside annuities, the principal is fully protected against market downturns. However, FlexShield 10's Floor Limit suggests a level of risk and potential loss, albeit capped, which can vary annually. Accepting a level of risk through the Floor Limit allows for the selection of higher participation and cap rates. 

For example, consider the Bank of America Destinations annual point-to-point index with a participation rate. Here, the default participation rate (with a 0% floor) is 130%. However, if you are willing to accept a floor limit of -2.5% (meaning that if the index goes down up to 2.5%, your part of the annuity value invested in this strategy will also be reduced by 2.5%), you will get a better participation rate of 155% (instead of the regular 130%.) 

In my professional opinion, opting for a negative floor limit in the FlexShield 10 Fixed Indexed Annuity may not be the most advisable choice for several reasons. Firstly, the complexity involved in calculating and understanding the implications of a negative floor limit can be significant. This complexity might lead to challenges in fully grasping the risks and potential outcomes, especially for those not deeply versed in financial intricacies. Secondly, it's worth noting that many other annuities offer competitive or even higher rates with a regular 0% floor, thus presenting potentially better options without the added risk and complexity of a negative floor limit. These alternatives might provide a more straightforward and secure investment route while still offering attractive returns.

The unique feature of the FlexShield 10 Fixed Indexed Annuity is its negative floor limit paired with the potential for higher returns. However, advising against opting for this feature essentially suggests reconsidering the annuity as a whole. Ultimately, the decision hinges on individual investment goals and risk tolerance, acknowledging that this feature may not align with the typical objectives of annuity investments.

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 FlexShield Fixed Index Annuity.

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.

Note that this surrender charge schedule is only valid for the American Equity FlexShield Fixed Index Annuity product for select states. For complete details about each state, you may visit the product’s brochure here.

The surrender charge of American Equity FlexShield Fixed Index Annuity is pretty much in line with all the other annuity issuers.

Contract/Administrative Charge

The American Equity FlexShield Fixed Index Annuity levies no annual contract or administrative fees.

Death Benefit

Upon the annuitant’s death, the beneficiary(s) will receive - the greatest of the annuity’s accumulation value, guaranteed minimum value, or the premium minus any withdrawals and corresponding withdrawal charges, adjusted by any Market Value Adjustments (net premium).

Riders

The American Equity FlexShield 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, one aspect that I believe could be improved is the inclusion of waivers for nursing home care and terminal illness. While most annuities typically offer these waivers for free, I was unable to find any mention of them in the annuity's marketing materials.

What makes this product stand out?

The American Equity FlexShield 10 offers some of the features that not manyfixed-indexed annuities offer.

The ability for better returns, albeit higher risk
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 to $25,000. The low minimum purchase requirement enables even small investors to purchase annuity products.
Multiple Lifetime Withdrawal Options

What I don’t like

The FlexShield 10 Fixed Indexed Annuity's negative floor limit increases risk and complexity, deviating from the typical stability offered by fixed indexed annuities.
The introduction of risk through the negative floor limit may negate the primary benefits sought in annuity investments, particularly for those seeking more secure and straightforward financial products.
The company does not provide free withdrawals in cases of terminal illness or nursing home confinement, features that are commonly included in most other Fixed Indexed Annuities.

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:

American Equity has managed to maintain decent ratings for many years. It is considered to be strong and stable financially. As of year-end 2021, some of the other financial highlights for American Equity include its:

$5.97 billion in total sales / direct written premium
$6.23 billion of total stockholders’ equity
$430 million in net income
$78.4 billion in total assets

Conclusion

With the advancement in healthcare and technology, the average American today is living 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 to mitigate the risk of outliving your income but also ensures that you continue to live a decent life even in your retirement.

Te FlexShield 10 Fixed Indexed Annuity, with its unique feature of a negative floor limit, offers a distinct approach to annuity investments. While it presents an opportunity for potentially higher returns, this comes with increased risk and complexity. This aspect might not align with the traditional objectives of annuity investments, especially for those seeking stability and simplicity. Investors should carefully consider their financial goals and risk tolerance before opting for this product.

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.