“This product offers more upside potential than FIAs with only limited downside risk,” says one annuity watcher familiar with the product. “If you do not need 100% downside protection, you could get much more upside potential with this product.”
By and large, annuity owners are a conservative lot. So it can be hard to please would-be buyers thinking about an annuity product with equity exposure.
If they opt for a variable annuity, they must accept the risk of losing money in a market downdraft – a tough call for folks who tend to minimize risk. They can sidestep this by buying a fixed indexed annuity (FIA), sheltering owners from losses, but they must also take a substantial haircut on market gains.
Fortunately, a newer type of annuity – a structured variable annuity, or “buffer annuity” – offers a nice compromise between these two mainstream annuities, and one that may offer more appeal to stock-oriented annuity investors. In exchange for receiving a higher earnings cap than offered by FIAs, investors pick up part of the losses in an underlying index in significantly down markets. But they are often structured in such a way so that owners are likely to come out ahead of the game in a multi-year scenario.
An older such annuity – the AXA Structured Capital Strategies PLUS annuity – was founded in 2010, reaps robust annual sales of about $6 billion and may be the best of the bunch.
“This product offers more upside potential than FIAs with only limited downside risk,” says one annuity watcher familiar with the product. “If you do not need 100% downside protection, you could get much more upside potential with this product.”
The concept of downside buffers is important to understand. Buffers are most typically 10-percentage points but can also be 20 or even 30-percentage points. Say, for instance, that an annuity owner opts for a 10-percentage point buffer and the S&P 500 – one of the indexes in which annuity owners can invest – declines 20%. His or her loss would be 10%, not 20%.
Buyers of Structured Capital Strategies have three investment options from which to choose; all are six years in duration. One offers an S&P 500 earnings cap of 11% with a 10% downside buffer, calculated annually. A second option pays a 7.5% cap on the S&P 500 with a 10% buffer. also calculated annually. In the second option, unlike the first, owners receive the 7.5% cap as long as the market is at least flat or slightly positive.
The third and most popular option, unlike the first two, calculates returns over the entire six-year period of the contract. Buyers choose between a 10-percentage point buffer on the S&P 500, a 20-percentage point buffer or a 30-percentage point buffer. The lower the buffer, the higher the earnings cap. (Those who choose the 10% option have no cap at all on the S&P 500.) The higher the buffer, the lower the earnings cap.
The third investment option may be the best choice because historical market data shows that the S&P 500 lost more than 10% only 11 times in the last 38 years and has never lost more than 20% over six years.
On all three options, investors can also choose to invest in the small stock Russell 2000 index and in some cases the MSCI EAFE index.
This annuity has a six year surrender charge schedule. The minimum investment is $25,000. As solely a capital appreciation product, there are no income riders and no fees.
Given that the earnings cap rate on most FIAS on the S&P 500 is typically 5% to 6.5%, investors in this product obviously have more upside potential. There is more risk – yes – but not that much more over a multi-year timeframe.
