Pacific Life Index Edge Fixed Indexed Annuity Review

The Pacific Life Index Edge Annuity is almost identical for all three policy tenures, except for the crediting period, surrender charge schedule, and indexing rates. For ease of discussion and better clarity, we will discuss the Pacific Life Index Edge 7 for the rest of the article.

Product Policy

How does the Pacific Life Index Edge policy work?

Any annuitant (maximum age at the time of policy issue: 85) can purchase the Pacific Life Index Edge Annuity with a minimum initial purchase amount of $25,000. 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, various events may trigger earnings credit: On free withdrawals, for a long-term care/terminal illness/injury event, or when a death benefit is payable.

The Pacific Life Index Edge Annuity offers the annuitant the ability to choose from one or more of the two indexes to determine their earnings crediting formula. Each of these two indexes has different strategies and a fixed-rate guaranteed interest strategy to choose from (making a total of 5 strategy options). We will discuss each available index briefly:

It is very important to note that the Pacific Life Index Edge Annuity comes with cap rates, participation rates, spreads, or performance-triggered options for these indexes, meaning that you will be credited only a part of the index return to your annuity. These rates change frequently; I will discuss 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 change from time to time. The Fixed Value Rate for the 7-year withdrawal charge period at the time of writing this article was 4.25%. You can view the latest fixed rates of this annuity.

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 with the help of your trusted advisor and/or on the company’s website. You can view the latest indexing rates of this annuity.

The Pacific Life Index Edge Annuity uses five crediting strategies:

Fixed Account Option

S&P 500 Index

BlackRock Endura Index

Point to point with Cap: Cap rate is the most important terminology in a Fixed Indexed Annuity. It means the rate at which your interest-earning capacity is capped. For example, if an index returned 13% but your contract’s cap rate is 7%. In this situation, you will be eligible for an interest credit of only 7%. It doesn’t matter how much the index goes above the cap rate; the maximum interest you can earn is the cap rate.
Performance-Triggered Index Option with Declared Rate: A flat or positive index return triggers the declared interest rate to be credited to the contract value. If the index return is negative, no interest is credited, but there will be no loss, and the contract value will remain the same. Suppose the change in the value of the index during that one year is zero or positive. In that case, the declared index gain interest rate is multiplied by the option’s account value to determine the index interest credits. The index interest credits pursuant to this option will never be less than zero. The declared interest rate is set at contract issue and applies for the entire withdrawal charge period. In this case, the performance-triggered rate for the S&P 500 Index is 6.80%. It means that if the S&P Index doesn’t go negative for a given 1-year period (even if the growth is 0% and not negative), the interest credited to the annuity will be 6.80% irrespective of the S&P 500 actual return.
Point-to-Point Option with Participation Rate and Spread: This indexing strategy applies BOTH participation rate and spread to determine the index interest credit. The formula to calculate index credit in this strategy is: (Index Return x Participation Rate) – Spread = Interest Credited. Let’s take an example where the participation rate is 60%, the spread is 2%, and in a given year, the index returned 10%. In this case, the interest credited to the annuity account would be 60% of 10% (PR), less 2% (SP), i.e., 4%.
Fixed Rate: If you opt for a fixed rate, you simply earn the fixed rates for a particular period specified by the company before your policy begins. These rates are usually very low 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 4.25%.

An annuitant can allocate different portions of their premium to various indexing strategies. For example, they could allocate 30% of their premium to the S&P 500 Index with a 1-year annual point-to-point with a cap rate, 20% to the S&P 500 Index with a 1-year point-to-point with a performance-triggered index option, 25% to the BlackRock Endura Point-to-Point Option with a participation rate and spread, and the remaining 25% to a Fixed Account. This flexibility allows annuitants to tailor their investment strategy according to their risk tolerance and financial goals.

Let’s look at the Pacific Life Index Edge Annuity rate chart to understand earnings crediting strategies better. Note that these rates are updated as of August 2024. These rates tend to change. Contact your trusted investment advisor to know the latest Pacific Life Index Edge Annuity rates.

From the above rate sheet, we know that there are 5 interest-crediting strategies: three S&P 500 strategies, one BlackRock Endura strategy, and one fixed rate strategy. You will notice Cap rates, participation rate with spreads, and performance-triggered options in place, limiting your maximum interest-earning potential.

Based on the index constituents, past performance, and volatility, I believe that the S&P 500 1-year point-to-point with Cap strategy has the highest return potential (as of August 2024 rates).

Surrender Charge

Should your needs change unexpectedly, and you need to take an excess withdrawal (a withdrawal above the free withdrawal amount available in a given contract year), you may be entitled to access additional monies. However, certain charges and penalties may apply. Any amount withdrawn over the remaining free withdrawal amount is subject to a Surrender Charge. Below is the Surrender Charge schedule for the Pacific Life Index Edge 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.

This surrender charge schedule is only valid for select states (California usually has a different rate structure) for the Pacific Life Index Edge Annuity product. For complete details about each state, you may contact your trusted financial advisor.

Contract/Administrative Charge

The Pacific Life Index Edge Annuity levies no annual contract or administrative fees.

Riders

In an insurance policy, riders are an additional provision that can be added to enhance the benefits of the base policy. The Pacific Life Index Edge Annuity comes with an optional death benefit, enabling annuitants to help protect and enhance the legacy they leave to their beneficiaries, and an enhanced income benefit that helps annuitant to withdraw an annual income payment that they cannot outlive.

Interest Enhanced Death Benefit

Interest Enhanced Death Benefit is an optional benefit that guarantees your death benefit will grow annually by the amount of interest credited to your contract, plus an additional 2%, for either 20 years or until age 85, whichever is earlier (different terms for different states). The charge for this benefit is 0.40% of the Death Benefit Base deducted annually from your contract value (not the Death Benefit Base). Your beneficiaries will receive the greater of your Interest Enhanced Death Benefit Base or the standard death benefit amount upon your death. This optional benefit is subject to state and broker/dealer availability and variations. Please refer to the Interest Enhanced Death Benefits brochure for more information and work with your financial professional to determine if this optional benefit is appropriate for your financial needs.

Enhanced Lifetime Income Benefit

The Enhanced Lifetime Income Benefit is an optional guaranteed minimum withdrawal benefit. Before reaching the maximum annuity date, this benefit serves as an alternative to annuitization, allowing for guaranteed lifetime withdrawals starting at or after age 59½. It also offers a 5.50% Annual Credit, which is added to your withdrawal base for up to 10 years. Note that this credit is not added to your contract value and does not represent a rate of return. The current annual charge for both Single Life and Joint Life options is 1.00% of the Protected Payment Base, with a maximum charge of 1.50%.

Also, as with most annuities, the Pacific Life Index Edge fixed-indexed annuity has free in-built nursing home and terminal illness waivers.

Qualified Nursing Care Benefit – After the first contract year, 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 30 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, 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.

What makes this product stand out?

The Pacific Life Index Edge Annuity offers some features that not many fixed-indexed annuities offer. The ones that I like the most are:

The plan offers good indexing strategies on the S&P 500 index
Decent Caps, Performance-Trigger, and Fixed Rate: Caps on the equity indexing strategies are a bummer! However, the good thing with the Pacific Life Index Edge Fixed Indexed Annuity is that it provides decent caps, even for a very popular index like the S&P 500. Similarly, it also offers a performance-trigger rate than many of its competitors. It also offers competitive fixed rates.
No annual contract, mortality & expense, or administrative fees
Free Confinement and Terminal Illness Waiver Benefit: This no-fee rider is automatically included for owners under age 65 and includes both a Qualified Nursing Care and Terminal Illness Benefit:
Multiple Payout Options: Life Only, Life with Period Certain, Joint and Survivor Life, Period Certain, Single Life or Joint Life with Cash Refund, and Single Life or Joint Life with Installment Refund.

What I Don’t Like

This product is generally good on all fronts for people looking for both growth and optional riders; still, there are some features that could add more value for the annuitant. Some of the features that I don’t like about the policy are:

Less Number of Indexing Options
Above-average Optional Rider Cost - The cost of the enhanced lifetime income rider in the Pacific Life Index Edge annuity is slightly above average compared to peers offering similar benefits.
High Initial Payment: $25k vs. $10k on other popular plans

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.

Pacific Life Insurance Company

Pacific Life Insurance Company has been in business since 1868. It has been one of the largest providers of annuities in the US for many years and has regularly been in the top ten Fixed Indexed Annuity Sales. It is one of the Fortune 500 companies, with a ranking of #312 (at the time of writing this article)

It is rated as follows by the rating agencies:

Pacific Life Insurance Company has managed to maintain decent ratings for many years. It is considered to be strong and stable financially. In 2023, the company paid out nearly $18 billion in benefits and claims. As of year-end 2023, some of the other financial highlights for Pacific Life include its:

$15.1 billion in adjusted operating revenues
$14.7 billion of total stockholders’ equity
$1.28 billion in adjusted operating income
$217 billion in total assets

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

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 that has the ability to provide a fixed guaranteed income during the retirement years. This helps you mitigate the risk of outliving your income and ensures that you continue to live a decent life even in your retirement.

The Pacific Life Index Edge Annuity is one such annuity that helps you grow your savings with much less risk. Through its indexed annuity, it offers principal protection and the opportunity to participate risk-free in the market index. Additionally, it provides the option to add riders for enhanced benefits, such as a guaranteed income stream and an enhanced death benefit for leaving a legacy. If you are considering buying a Fixed Indexed Annuity that works on the growth front with optional income and death riders, the Pacific Life Index Edge Annuity might be an ideal product to consider.

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.