MassMutual American Legend 7 Fixed Indexed Annuity Review

How does the American Legend 7 Fixed Indexed Annuity policy work?

Any annuitant (maximum age at the time of policy issue: 85) can purchase the MassMutual American Legend 7 Fixed Indexed Annuity with a minimum initial purchase amount of $10,000, 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 Legend 7 Fixed Indexed Annuity offers the annuitant to choose from one or more of the four indexes (S&P 500 Index, iShares U.S. Real Estate Index, SPDR GLD Index, S&P U.S. Retiree Spending Index) to determine his earnings crediting formula. The S&P 500 index has four strategies, and the other three indexes has one strategy each. The plan also offers a fixed-rate guaranteed interest strategy to choose from, making a total of 8 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.

iShares U.S. Real Estate Index

The iShares U.S. Real Estate ETF seeks to track the investment results of an index composed of U.S. equities in the real estate sector. IYR is among the first US real estate ETFs and has been a stalwart in the space. The fund tracks a typical broad-based real estate index and captures much of the real estate space, including REITs and firms investing directly or indirectly in real estate through development, management, or ownership, including property agencies.

The iShares U.S. Real Estate Index was created in June 2000, and since its inception, its annualized return, as reported by iShares, stands at 8.37% (at the time of writing this article).

S&P U.S. Retiree Spending Index

The S&P U.S. Retiree Spending Index measures the performance of a balanced, multi-asset investment strategy across equities and fixed income. The equity exposure in the index targets economic sectors that are expected to be impacted by retiree spending due to a changing US demographic and the fixed income exposure helps to reduce the equity risk and overall portfolio volatility. The S&P U.S. Retiree Spending Index also provides diversified asset exposure by equally weighting its two components – the allcap S&P U.S. Retiree Spending Equity Index and the S&P U.S. Retiree Spending Bond Futures Index.

The S&P U.S. Retiree Spending Index was created in September 2016, and the last five years annualized return, as stated by S&P, stands at 5.00% (at the time of writing this article). It is very important to note that the American Legend 7 Annuity comes with cap rates or participation rates for these indexes, meaning that you will be credited only a part of the index return to your annuity. These rates tend to change frequently; I will discuss more on these rates more shortly. 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 tend to change from time to time. The Fixed Value Rate for the 7-year withdrawal charge period at the time of writing this article was 4.50%. It is noteworthy that the fixed rates offered by MassMutual are amongst one of the highest when we compare it with other annuities. You can view the latest rates of this annuity here

Rates and Costs associated with the American Legend 7 Fixed Indexed 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.

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 MassMutual American Legend 7 rate sheet (at the time of writing this article) to understand how the earnings are determined.

The first thing to note is that we have four indexes. Each index has point-to-point strategies, while the S&P offers an added option of monthly sum. Additionally, we have a fixed rate strategy to choose from. All in, we get to choose from a total of eight strategies (seven 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 MassMutual:

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/Declared 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 4.5%.

Monthly Sum

The indexed interest rate for a term year is based on monthly index changes. A monthly index change is determined by comparing the closing index value at the end of that month to the closing value at the beginning of that month. A positive monthly change in a term year is adjusted by applying the monthly cap for that term year. The indexed interest rate for a term year is the sum of the 12 adjusted monthly index changes for that term year. The credited rate will never be less than 0%.

Thus, it is very important to check rates before choosing your preferred index.

Out of all these indexes, at this point in time, I would prefer the S&P 500 point-to-point index with an 11% Cap because the index has been time-tested, has good real performance, and has a relatively high index cap rate (participation rate) offered by the company. There are very less number of companies that offers a double-digit cap rate on such a popular index.

Surrender/Early Withdrawal 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 MassMutual American Legend 7 Fixed Indexed Annuity.

Market Value Adjustments – 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 policy also has No-MVA rates (check the rate card above). If you chose No-MVA rates, you’ll earn less interest credit than the MVA rates, but No Market Value Adjustments will be applied shall you surrender/withdraw from your account. Do note that the surrender charges still apply.

If you feel that you’ll never need to surrender your policy, you should go with the MVA Rates option only.

Contract/Administrative Charge

The American Legend 7 Fixed Indexed Annuity levies no annual contract or administrative fees

Riders

Riders are an important part of the American Legend 7 Fixed Indexed Annuity. The American Legend 7 Fixed Indexed Annuity comes with an option to select from two additional, chargeable riders:

Income Secure – Enhanced Lifetime Income Rider
Inheritance Enhancer – Enhanced Death Benefit Rider

IncomeSecure – Enhanced Lifetime Income Rider

When you purchase the IncomeSecure rider, a Benefit Base is set up for your rider. The benefit base starts with the account value and is increased by additional purchase payments and rollup credits.

Your rider’s Benefit Base is NOT the same as the annuity’s Accumulated/Account 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 Income Base 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 Income Base (and thus the amount of future Lifetime Income Withdrawals) proportionally. For example, withdrawing 10 percent from your Accumulated Value will reduce your Income Base by 10 percent too.

Rollup Credit – At the end of each year during the 10-year rollup period, the current benefit base is increased by 6% of all purchase payments received in the first contract year, including any applicable purchase payment bonuses. The rollup credit for a purchase payment received after the start of the first contract year will be prorated. Rollup credits are not applied to purchase payments received after the first contract year. Rollup credits cannot increase the benefit base to more than the rollup cap, which is equal to 250% of the purchase payment amount.

Income Payments – If the client is 55 years old or older, income payments may be taken at any time through withdrawals based on the benefit base and the income option that was selected. There are two ways to receive income:

Single lifetime income
Joint lifetime income

If the joint lifetime income is selected, the owner and spouse must be at least age 55 on the income start date, and the age of the younger spouse or legally recognized domestic partner is taken into consideration.

To calculate the Maximum Lifetime Income, the following formula is used:

Benefit Base at the time of first withdrawal * Lifetime Income Withdrawal Percentage

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):

The income percentage increases by 0.10% each year until it reaches 7.5% for single lifetime income and 6.5% for a joint lifetime income. The income percentage is locked in and will not change once income payments begin.

Rider Charge – An annual charge of 0.95% of the benefit base will be taken at the end of each contract year. The charge is deducted from the account value. A prorated portion of the rider charge will be taken upon surrender of the contract or termination of the rider. The rider charge will be refunded at death if income payments have not started.

Inheritance Enhancer – Enhanced Death Benefit Rider

Inheritance Enhancer rider enables you to leave a legacy for your loved ones. Similar to the income enhancer rider, a benefit base is set up to determine the enhanced death benefit. The growth and rules of the benefit base are the same as illustrated above. However, the income payment options are different and are illustrated below:

Death Benefit Options – The rider’s death benefit is available after the fifth contract anniversary and replaces the annuity contract’s death benefit. Beneficiaries may choose one of two death benefits:

Lump sum

Beneficiaries may select to receive the basic death benefit amount equal to the account value plus 50% of the difference between the account value and benefit base amount.

Annuitization

If beneficiaries elect to have the rider death benefit paid for life or a fixed period of at least five years, then the rider death benefit amount will be equal to the account value plus the entire difference between the account value and the benefit base amount.

Effect of Withdrawals – Withdrawals may be taken during any phase of the contract, but the account value, rollup credits, and benefit base may be affected. The benefit base will be reduced for any withdrawals taken.

Rider Charge – An annual rider charge of 1.15% will be taken at the end of each contract year. The charge is based on the benefit base and is deducted from the account value. If your client surrenders the contract or terminates the rider, the rider charge will be prorated.

The American Legend 7 also comes with an Extended Care and Terminal Illness Waiver. This no-fee benefit is automatically included for owners providing them with Extended care and Terminal Illness benefit.

Extended Care 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 for at least 90 consecutive days. No withdrawal charge or MVA apply 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 with a prognosis of 12 months or less. No withdrawal charge or MVA apply 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.

What makes this product stand out?

The American Legend 7 Fixed Indexed Annuity offers some of the features that not many fixed-indexed annuities offer. The ones that I like the most are

Higher Free Withdrawal Rate

The American Legend 7 Fixed Indexed Annuity has a free withdrawal rate of 10% of the initial premium or 10% of the annuity’s Accumulated Value; each year. This rate of 10% is higher than what we see in typical accumulation annuities that generally offer only 7% of the contract’s value as free withdrawals.

Higher Caps and Participation Rates

Caps on the equity indexing strategies are a bummer! However, the good thing with the American Legend 7 Fixed Indexed Annuity is that it provides higher caps, even for many popular indexes like the S&P 500. Similarly, it also has higher participation rates than many of its competitors.

Access to Most Popular Indexes and a Higher Fixed Declared Rate
Multiple Lifetime Withdrawal Options
Free Confinement and Terminal Illness Waiver

No annual contract, mortality & expense, or administrative fees

What I don’t like

I don’t like the following limitations of this annuity.

No free riders, and a limited number of riders to choose from
No Benefit Base boost, as provided by some of its closest competitors

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.

MassMutual Ascend Life Insurance Company

MassMutual Ascend Life Insurance Company has been in the business since 1951. It is one of the largest providers of fixed and fixed indexed annuities in the US for many years and has been regularly in the top ten Fixed Indexed Annuity Sales.

It is rated as follows by the rating agencies:

MassMutual Ascend Life Insurance Company has managed to maintain decent ratings for many years. It is considered to be strong and stable financially. In 2021, the company paid out nearly $7 billion in claims. As of year-end 2021, some of the other financial highlights for MassMutual Ascend Life Insurance Company include its:

$44 billion in total sales / direct written premium
$32.8 billion of adjusted capital
$2.1 billion in net operating income
$327.5 billion in total assets

Thus, going by the operating history and financial numbers, we can safely gauge that you can trust your savings with MassMutual Ascend Life Insurance Company.

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.

The MassMutual American Legend 7 is one such annuity that helps you grow your savings with much less risk. Through its higher cap and participation rates,  and optional riders, It offers principal protection and the opportunity to participate risk-free in the market index, providing a stream of guaranteed income and even legacy planning!

If you are considering buying a Fixed Indexed Annuity that works best for both income growth and guaranteed lifetime income, the MassMutual American Legend 7 FIA is a decent product to look after.