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 IncomeShield 10 Fixed Indexed Annuity. The American Equity IncomeShield 10 is a deferred, fixed-indexed annuity that could be a suitable choice for individuals seeking to leave a legacy, secure lifetime income, preserve principal safety, and access robust indexing options. After extensive research and due diligence, I have provided an in-depth and unbiased analysis of this plan.
The review of the American Equity IncomeShield 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 IncomeShield 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 IncomeShield Fixed Indexed Annuity, and then we will discuss each point in detail.
| Product Name | American Equity IncomeShield |
|---|---|
Issuing Company | |
AM Best Rating | A- (4th of 13 ratings) |
Withdrawal Charge Period(s) | 7, 9 and 10 years |
Maximum Issue Age | 80 Years |
Minimum Initial Purchase Amount | $5,000 |
Surrender Charge Schedule | Varies for different tenure policies |
Crediting Period and Strategies |
|
Plan Types |
|
Indexes |
|
Additional Benefits | 10% Premium Bonus |
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, plus 100% bonus vesting. |
Riders | Paid Lifetime Income Benefit Rider (LIBR) - Multiple Options |
Minimum Guaranteed Surrender Value | 87.5% of the premiums received, less any withdrawals, accumulated at the minimum guaranteed interest rate (3.00% 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 IncomeShield Fixed Indexed Annuity is almost identical for all policy tenures, except the crediting strategies and surrender charge schedule. For ease of discussion and better clarity, we will discuss the American Equity IncomeShield 10 Fixed Indexed Annuity for the rest of the article.
Product Policy
How does the American Equity IncomeShield 10 policy work?
Any annuitant (maximum age at the time of policy issue: 80) can purchase the American Equity IncomeShield 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 or terminal illness or injury event, or when a death benefit is payable.
The American Equity IncomeShield 10 allows the annuitant to select from among six indices to establish their earnings crediting formula. Four of these indices offer two strategies each, the S&P 500 Dividend Aristocrat provides three strategies, and the S&P 500 Index features five strategies to choose from. Additionally, the plan permits the annuitant to opt for a fixed rate, resulting in a total of 17 strategy options. We will discuss each available index briefly:
1. 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.
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.
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.
5. 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.
6. 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 IncomeShield 10 Fixed Indexed Annuity includes cap rates, participation rates, and performance triggers 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 1.10%.
Typically, I would 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. However, in this case, the cap and participation rates for the S&P 500 are insufficiently attractive to warrant consideration. In my opinion, none of the strategies in this annuity are ideal for accumulation, as this annuity is mainly for lifetime withdrawals. But if you want to choose one out of these indices, the UBS Tech Edge Index might be a good option, as it offers a relatively higher participation rate, and its back-tested returns are also higher compared to other indices. 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 and caps that the company has in place that affect our earnings.
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 IncomeShield rate sheet (as of March 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 five strategies, the S&P 500 Dividend Aristocrat has three strategies, and other indexes have two 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 17 strategies (16 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 are 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 1.1%.
The rate sheet of the American Equity IncomeShield Fixed Indexed Annuity is not lucrative, and it offers low cap and participation rates for the S&P 500 index compared to other annuities. But if you want to choose one out of these indices, the UBS Tech Edge Index might be a good option, as it offers a relatively higher participation rate, and its back-tested returns are also higher compared to other indices.
However, the USP of this annuity lies in lifetime income payments (and not income growth), which is discussed in the later part (Riders) of this review. Note that these rates tend to change over time; your financial advisor can help you know the latest rates.
In addition to the premium you put into your annuity at the beginning, the company credits a 10% premium bonus, which is vested in 10 equal installments over a period of 10 years. Below is the premium bonus vesting schedule. To compensate a bit for lower cap and participation rates, this seems to provide a decent head start to your annuity account.
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11+ |
|---|---|---|---|---|---|---|---|---|---|---|---|
Vested % | 0 | 10 | 20 | 30 | 40 | 50 | 60 | 70 | 80 | 90 | 100 |
Riders
Riders are one of the main highlights of the American Equity IncomeShield 10 Fixed Indexed Annuity. The IncomeShield Fixed Indexed Annuity comes with a paid optional Lifetime Income Benefit Rider (LIBR) rider that allows the annuitant to withdraw fixed and predictable lifetime income payments that the annuitant can’t outlive.
Lifetime Income Benefit Rider
The American Equity IncomeShield 10 comes with an optional paid Lifetime Income Benefit Rider, which is the main highlight of this policy. We just discussed the rate sheet of the IncomeShield 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 Income Account Value (IAV). When you purchase the American Equity IncomeShield fixed indexed annuity and income rider, an Income Account Value (IAV) is set up for your rider.
Your rider’s IAV (Income 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 IAV 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 IAV (and thus the amount of future Lifetime Income Withdrawals) proportionally. For example, withdrawing 10 percent from your Accumulated Value will reduce your IAV by 10 percent, too.
The Income Account Value is calculated as follows:
Initial Premium + Initial Bonus + Annual Interest Credits - Withdrawals from your annuity
Now, for determining the IAV account growth, the annuitant can choose from 1 of the 5 options given by the company:
“Option 1” is a no-fee option that allows the IAV to grow at a 4% compound interest.
“Option 2” has a rider fee of 1.10% and allows the IAV to grow at 8.25% simple interest.
“Option 3” again has a rider fee of 1.10% and allows you to grow your IAV by a 6.5% compounded rate for 20 years.
“Option 4” and “Option 5” have a rider fee of 1.20% and come with a well-being benefit. This benefit allows increases in income by an income payment factor for up to 5 years if the contract owner (or their spouse) becomes unable to perform multiple activities of daily living outlined in the contract. There is a two-year waiting period for this benefit to be activated. Option 4 calculated the growth as 8.25% simple interest per year, while option 5 calculates growth as 6.5% compounded interest for 20 years.
The rider fees are deducted annually from your accumulated value account. If I were in your position, I would consider either Option 1 (if seeking a free rider) or Option 5 (if comfortable with a paid rider). This is because, for an additional 0.10% in fees, you would gain the well-being benefit and higher growth rates compared to other options.
Now, to calculate the Lifetime Income payments, the following formula is used:
IAV * Lifetime Income Withdrawal Percentage
Potential for Income Payment Increases: When lifetime income payments begin, payouts can continue to increase with the IAV growth. The annual income payment amount will be increased by an amount equal to the current annual income payment multiplied by the IAV growth rate.
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):
Suppose you opt for a single-life policy and begin taking lifetime payment withdrawals at age 70. In that case, you will be eligible for a payout factor of 7.25% of your IAV. If your IAV is $200,000 at the time of your first withdrawal, your annual lifetime payment will be set at:
$200,000 * 7.25% = $14,500.
Unless you make excess withdrawals, you will continue to receive these annual payments even if your contract value becomes zero.
The American Equity IncomeShield 10 also comes with a Confinement and Terminal Illness Waiver. This no-fee benefit is automatically included for owners, providing them 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 IncomeShield 10 Fixed Indexed Annuity.
| Completed Contract Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11+ |
|---|---|---|---|---|---|---|---|---|---|---|---|
Surrender Charge % | 9.1% | 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 IncomeShield Fixed Indexed Annuity levies no annual contract or administrative fees.
What makes this product stand out?
The American Equity IncomeShield 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 IncomeShield 10 annuity offers a free Lifetime Income Benefit Rider if you opt for Option 1.
- 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
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 lifetime income withdrawals. 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 American Equity IncomeShield 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. If you are considering buying a Fixed Indexed Annuity that works best for estate planning and Guaranteed Lifetime Income, the American Equity IncomeShield 10 Fixed Indexed Annuity 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.