Understanding monthly point to point annuity with cap accounts is very important if you are a current or potential indexed annuity investor. Typically, these accounts offer some of the highest potential for yearly returns when markets steadily trend upward.

This post is the second in our ongoing series discussing indexed annuity sub-accounts. Our first was an explanation of the yearly point to point (PtP) account. The monthly version works a bit differently, but in the right market environment, it can credit significant returns.

Indexed Annuity Investment Sub-accounts

Hopefully, you are well read on the pros and cons of indexed annuity investing. We are taking it a step further here and describing how a point to point sub-account credits interest to indexed annuities. (See Chart Below)

Almost all indexed accounts offer the PtP option. And some offer it for different market indexes like the S&P 500, NASDAQ or Dow Jones – all within the same annuity. The PtP option (like most investments) performs best when the market is climbing steadily with few significant declines.

Explaining The Monthly Point To Point Annuity Account

It’s important to note that not all PtP accounts work in the same manner, but for the purposes of this article, we will explain the most common type and its yearly interest crediting method.

First, you must understand that the PtP is almost always a yearly account. No interest is credited until your 12 month term has been reached. Oftentimes, consumers see the word monthly and think the account will credit interest each month. This is not the case.

The monthly point to point annuity account credits interest yearly based on the performance of the chosen index – usually the S&P 500. The yearly interest credit is calculated by adding the monthly gains (subject to cap) and subtracting the monthly losses (no cap) each month – usually over a twelve month time period. This twelve month time period will not necessarily track the calendar year.

How A Monthly Cap Affects Your Indexed Annuity Gains

Not all annuity sub-accounts have a monthly cap, but the point to point account almost always does. If the monthly gains in the S&P 500 are the gas that power your returns, then the monthly cap is the brake. An annuity cap is a very important number and investors need to work with an agency like ours to find the best one.

It’s as simple as this: The lower the cap, the lower your potential for gains. The cap is not your friend; it’s the mechanism insurance companies use to hedge against losses and remain profitable so that your money stays safe & insured.

Monthly Point To Point Annuity Example

The easiest way to explain how interest is calculated and credited to your annuity is by a hypothetical example. Most of 2013 was a very good year for investing in the overall markets. The market went up most months, there was little volatility, and the bad months weren’t too bad in comparison to some years in the past.

2013 S&P 500 Annuity Point To Point Performance Chart

So what do the numbers in the chart above mean? In a nutshell, the S&P 500 gained 26.55% (excluding dividends) in 2013 – and an indexed monthly point to point annuity with a 2.50% cap would have returned 17.73% during that same time period.  Are these gains realistic? In a word yes, but of course 2013 was a good year in the market and was not the norm over the last decade.

As with all insured indexed annuities, you are sacrificing some gains for safety, stability and peace of mind. You would not expect returns of 17% on a regular basis, but it is comforting to know they are possible and that you will never experience market losses of any kind – ever.

Is There A Downside Cap To My Indexed Annuity Gains?

Yes, you can never go below zero – no matter how far the market tumbles. One bad month can erase all of your monthly gains for your 12 month term, but your account will not decrease in value overall and your gains from prior years are locked in.

In other words, you can have a year with no gains when investing in a monthly point to point annuity, but not a year where your account loses money. Your premium bonus and gains from prior years are locked in and not subject to market downturns.

You can see in the chart above that there are no downside caps for months where the S&P 500 turned negative. The worst case scenario is that you could be having a good year, but a big market correction could wipe out all of your paper gains from the first 11 months. In this instance, your annuity would not credit interest, but even if the market was down overall, your annuity would not lose value.

Contact Us For Annuity Quotes And Information

Hyers and Associates Inc. is a full service insurance agency specializing in indexed annuity accounts. We can help you compare the caps, bonuses, terms and all other details of the indexed annuities that are most likely to offer the best performance.

In response to market demand, several insurance companies are offering annuity accounts with a guaranteed death benefit rider. These new riders increase the contract value each year by a guaranteed interest rate.

The annuity death benefit proceeds will be passed on to the insured’s beneficiary(s) in a lump sum – or over the course of a predetermined number of years. Those who are looking to lock-in gains and transfer wealth might consider an annuity death benefit rider.

What Does An Annuity Death Benefit Rider Guarantee?

These riders simply guarantee a yearly increase in the annuity death benefit amount each year for a certain time period.

A common rider would increase the account value each year by 5% for a set number of years (usually ten).

Some companies allow the insured to re-up the rider for another ten years, but most contracts stop rolling up once the annuity owner turns age 85. Each policy is a little different.

The death benefit rider will not change once it has been added to the contract. The annual roll-up will not increase or decrease for the ten year period. The cost (if there is one) stays the same as well. After the ten year term, the annuity owner can decide to re-up once the new rates are established.

How Are The Annuity Benefits/Proceeds Accessed?

Upon the death of the insured/annuitant, the insurance company pays the contract beneficiary(s) the death benefit amount either in a lump sum or over a set number of years. Usually the minimum number of years needed to access the total benefit is 5 years.

In some cases, the annuity beneficiaries will have a choice. They can take a smaller sum all at once – or a larger sum over 5 years. Annuity owners who are looking to transfer wealth over a period of time might deliberately establish a 5 year payout for the next generation.  This can be an advantageous strategy with accounts that have not yet been taxed – like IRA’s.

If the annuity owner passes away before the ten year term has been completed, then the death benefit would only be calculated for the time the contract was in force – not the entire ten year term.

What Is the Cost For An Annuity Death Benefit?

These riders usually have an annual cost to the contract itself, but this cost does not lower the amount payable at death. Depending on the insurance company and the rider chosen, an average annual cost for a death benefit rider would be in the .70% – 1.10% range.

The annual cost means there are two accounts at work. The first is the walk-away value of the contract. The walk-away value is the amount payable to the insured if s/he surrenders the contract for some reason. The annuity death benefit rider will decrease the walk-away/surrender value each year should the owner cash-in or transfer the annuity.

The second value is the death benefit amount. This value compounds each year and is payable at death. Again, some annuities will offer this value in a lump sum while other accounts will require a 5 year payout.

The two values (walk-away & death benefit) will almost always be different. It is likely that the death benefit amount would be larger in the long run because there are no market risks, fluctuating interest rates, or annual costs to stunt its growth.

Annuity Income Riders With Death Benefits

In some cases, annuity death benefit riders are packaged with an income rider. This offers annuity owners more flexibility as they can access the death benefit value (if needed) by creating a lifetime income stream.

In many cases, the lifetime income stream might be the primary reason the rider was purchased. The increasing death benefit is a desirable feature, but guaranteed lifetime income during retirement might be the primary goal for some retirees.

This acknowledges the fact that annuities are not the most efficient investment for wealth transfer; that vehicle is life insurance. Life insurance is far and away the most efficient product for creating and transferring wealth on a tax-free basis. Readers can learn more about the use of life insurance for wealth transfer here.

Contact Us For Annuity Quotes

Fixed and indexed annuities offering an increasing death benefit can be a valuable feature for those looking to guarantee yearly gains, establish a lifetime income stream or pass an existing tax-deferred asset to the next generation.

At Hyers and Associates, we recognize that one size does not fit all when it comes to insurance and investment planning. Our independence allows us to help our clients find the most suitable products that best fit their long term needs and goals.

We have written extensively about the benefits and limitations of annuity income riders. There is a lot to learn about these accounts and we do our best to educate consumers online, over the phone and in person.

The purpose of this article is to discuss some of the innovations with newer income riders. Not all are created equal, but we help tailor our recommendations to what best fits your short and long term investing goals.

Summary Of Traditional Annuity Income Riders

First, a little background: Annuity income riders are usually separate riders purchased along with a fixed or indexed annuity account. Some are free while others have an annual cost deducted from the walk-away value of the contract.

An income rider creates a separate account (sometimes referred to as a ghost account) that increases each year at a predetermined rate – say 7%. After some years of deferral, the income account is activated and it creates a lifetime stream of income for the annuity owner(s).

In other words, there are two accounts with two separate values at work. One that the owner (or beneficiary) can withdraw lump sum and the other that is used to create a lifetime stream of income. If you would like more information about how these account work, please click here.

Leveraging Income For Long Term Care Expenses

Some new annuity income riders will leverage their payouts in order to account for long term care expenses. Should the income rider be activated and the insured be confined to a nursing home, then some contracts will triple the systematic payout for a maximum of 60 months.

There is no medical underwriting necessary for this feature; it is just an added benefit to help account for LTC costs. After 60 months, the income rider would revert back to its normal payment for the life of the insured(s) even if the annuity and/or ghost account was depleted.

Unfortunately, most riders that allow for a leveraged long term care payouts will only cover care in a nursing home environment. In the future, perhaps some riders will also leverage for home health care and assisted living.

It should be noted that there are traditional and hybrid policies that are more geared toward solely accounting for long term care costs. They will offer more flexibility and features than the income riders mentioned above.

Turning Income Off And Retaining Proceeds

One of the benefits of an annuity income rider is flexibility. These riders can be placed in deferral for several years in order to maximize future income. Once the income has been turned on, many riders allow the owner to turn it off and then back on later as needed.

In some cases, the accumulated income not withdrawn while the rider has been turned off can be accessed lump sum at a later date. If for example an activated income rider paying $10,000 a year was turned off for three years – the owner could withdraw $30,000 in a lump sum when the rider was reactivated.

This can be helpful for those who need the flexibility and accessibility of large sums of money at different times. This could be due to tax implications or inherited wealth or any other number of reasons. Most importantly, it is not a use it or lose it proposition for the annuity owner if income is turned off.

Adjusting Annuity Income For Inflation

Depending on your future income needs, it may be necessary for the systematic payments to increase year over year. Insurance carriers have accounted for this need in different ways so that your income can ratchet up over time.

Some riders will simply start at a lower rate and then increase by 3% each year. In other cases, income can grow based on the performance of the annuity itself. And others will track a known inflation indicator like the CPI and adjust future income based on its movements.

Constant and steady income may be right for some while income that adjusts for inflation might be better for others. There is always a trade-off when introducing new features to an income rider, but the important factor is that annuity owners have a choice.

Contact Us For More Information

Hyers and Associates is a full-service, independent provider of fixed and indexed annuities. We do the shopping for you. It does not affect your returns in any way to use our agency for your annuity transaction.

We will help you compare the various annuity riders and options available in your state of residence so that you may invest in the account that best suits your present and future needs.

Planning for retirement income is an often overlooked but necessary piece of any financial plan.  Some retirees rely on stocks and bonds, others opt for annuity accounts, and many use a mixture of both in order to diversify their assets.

Annuities have grown in popularity based on their history of safe & reliable returns and the guaranteed lifetime income they can provide. There are two classes of annuities used for future payments: Immediate and deferred income accounts.

This post will mostly focus on deferred annuity accounts with a guaranteed income rider. We offer both types to address all of our client’s needs.

Deferred Annuity Income Rider Examples

Income riders are gaining in popularity as investors are better understanding these products.  In a nutshell, a fixed amount (the principal) is deposited –  in either a lump sum or over time – in a deferred annuity offering a guaranteed income rider.  At some point later in time, the income rider is activated at the owner’s request and guaranteed lifetime income payments begin.

Let’s take a look at a very basic example of a 60 year old male who is planning for future income 10 years from now.  We will use an 8% income rider and place this on a $100,000 deposit with an annuity offering a first year 10% bonus.  (These are real numbers using a real annuity as of the writing of this post; future numbers might be more or less.)

Single Annuity Income Rider Illustration

If this account owner defers his income rider until age 70, then he will receive approximately $14,250 a year or $1,190 a month for his lifetime.  Assuming he lives to be 87 years old, then his $100,000 investment would have paid out $240,000 or more over his lifetime.  It is difficult to find a stock, bond or certificate of deposit portfolio that would provide such guarantees.

Spousal Annuity Income Rider – Joint and Survivorship

Now let’s take a look at a similar scenario that provides income for a husband and wife – both age 60.  Just as before, a $100,000 initial investment is made and the income rider is deferred for 10 years.

After ten years, the rider is activated and lifetime income begins for the couple.  Their lifetime payments would be over $13,000 a year or nearly $1,100 a month.  Thus if only one spouse lives to be age 90, then their $100,000 investment would have paid out over $260,000.  Again, this investment provides very appealing guarantees for those who are planning on future income.

It is also important to note that these illustrations are linear in nature.  This means, all other factors being equal, if the $100,00  initial investment was doubled to $200,000, then all of the income numbers would also double.

Income Withdrawal Percentages – Single And Joint

If you look at both charts carefully, you will notice that there is a significant jump in income from age 69 to age 70 with this particular product.  Like all income riders, the amounts paid to the owners are based on predetermined percentages as guaranteed by the insurance company.

In the case of the single man age 60, his withdrawal percentage jumps from 5% to 6% at age 70.  And with the couple, their income withdrawal percentage jumps from 4.5% to 5.5% at age 70. Thus, the income stream can vary somewhat significantly depending not only on the product and the insurance company, but also based on the withdrawal percentages allowed by the annuity rider.

Future Income Payments That Adjust For Inflation

The annuity income rider illustrated above also offers an inflation rider that allows the future payments to increase by 3% each year.

The 3% inflation rider has no direct cost to the owner(s), but it will adjust the withdrawal percentages lower meaning the annuity owner(s) will see less systematic income at onset, but perhaps much more later in life.

Inflation riders can be a valuable asset when attached to a guaranteed stream of income – especially if the annuity owners live well beyond their life expectancy.

Inflation protection is also appropriate for those who might need less income in the near future, but larger sums later in life for health care or other unforeseen expenses.

What Happens To Any Unused Annuity Funds?

Inevitably, investors want to know what happens if income is never taken or if only a portion of the income is withdrawn.  If the income rider is never activated, then the annuity would remain in deferral and the principal would grow over time based on current interest rates and/or the performance of a chosen indexed investment sub-account.

Thus, there are always two accounts at work; the first is the contract value and second is the income account value that is used to determine the future income stream. The owners can always walk away with their contract value and invest their principal elsewhere should their income needs change in the future.

It is important to know that most income riders have a yearly cost that is withdrawn from the annuity contract value each year. This cost does not affect the income account value, but should the income rider never be activated, then the owner(s) has paid for something that was never used.  In this way it is somewhat like a future income insurance policy.

A key benefit to these riders is that they can be turned on and off.  Unlike most immediate annuities, where the payment stream is irrevocable, income riders allow the owners to stop the payments should their needs change.  This provides much more flexibility and makes any decision about when to activate the rider much easier for the owner.

Residual Annuity Account Value At Passing

If there is an untimely passing and money still remains in the contract value, then those funds would be paid to the named beneficiary.  They are not kept by the insurance company.  However, if the contract value has been depleted, then the income payments would cease once the final owner of the account has passed away.

In some cases, any remaining amount in the income account can be taken by the annuity’s beneficiaries over a 5 year period.  However, like all lifetime annuity accounts, these products are primarily designed with the owner’s income needs in mind and are not always appropriate vehicles to transfer wealth to any named beneficiary.

Request Illustrations And Information

Hyers and Associates is an independent insurance agency specializing in annuity accounts.  We work with the leading carriers offering income riders including; Allianz, American Equity, Aviva, Equitrust, Jackson National Life, Midland, National Western Life, North American, Phoenix, Sagicor, and many others.

Using proprietary software, we can show investors how to maximize their income stream through early contract withdrawals that allow their income rider to remain in deferral for a longer period of time.