Pars, Caps, Etc.?

[jmarkk1]

I've been doing some research on FIA's crediting strategies, etc.

Can anyone tell me the major difference between pars, caps, etc. (monthly pt. to pt. vs. annual, etc.?)

Also, the Annexus Aviva BAA12 has fees for each of their crediting options, but there are no caps. Are the fees worth it for no cap? (2.95% on the high end fee)

Plus they do a 2 yr. crediting method vs. the 1 yr. annual reset.

Just trying to figure out if it's worth paying 2.95% for no caps given there crediting strategy.

 

[iceco1d]

What fees are you talking about? Is that their income rider fee? A FIA without a rider doesn't have any fees, unless you surrender it early.

 

[nathan.lee]

What fees are you talking about? Is that their income rider fee? A FIA without a rider doesn't have any fees, unless you surrender it early.

The Annexus BAA products have a spread associated with their various crediting methods which they internally refer to as a "Fee". The is most likely what JMark was referring to.

JMark,

Here is a post I made about some of the most popular indexing or crediting methods currently in use. Bear in mind that this was several months ago when rates were much higher than today. Also, another good source for info is Jack Marrion's Index Compendium.

Index Compendium


Ice,

I trust your judgement so please feel free to elaborate or correct anything I post.

[FONT='Verdana','sans-serif']Here is a quick lesson to remember about FIA's and their crediting methods. The 4 most common crediting methods used by FIA's are the fixed account, annual point to point, monthly average, and monthly point to point. With the exception of the fixed account, the others can be indexed against the S&P 500, the DIJA, the FTSE, or some other index depending on the product. Their performance is also limited by caps, spreads, participation rates or some combination thereof.

Let's look at a currently available FIA as an example of how each method works and when it might be appropriate to use it.

Fixed account: 2.50% (Rate guaranteed for 1 year)

1 Year S&P 500 Annual Point to Point with a Cap: 4.75%
Assuming a contract date of Feb 13th and a closing S&P 500 value of 1352 this will be the initial value for our index measurement. Let's assume the closing value of the S&P 500 is 1500 on the anniversary of this contract. 1352-1500 = 148. 148 represent a 10.9% increase in the S&P 500. In this scenario the account would be credited 4.75% based on the cap. This interest credit is locked in and the initial value resets. (annual reset) If there had been a decrease in the S&P 500 between the initial value and the anniversary value then the account would have received a 0%. Obviously the simplest of the index crediting methods. According to Jack Marrion's research this method represents the most consistent returns though time.

1 Year S&P 500 Monthly Average with a Cap: 5.00%
Assuming a contract date of Feb 13th this crediting method also records the "month-iversary" S&P 500 values. (Mar. 13th, April 13th, May 13th, etc) On the anniversary date the 12 data points will be averaged and the initial value will be subtracted to determine a gain or loss for the index. (Feb 13th = 1352, Mar 13th = 1368, April 13th = 1347, etc) Assume those 12 data points equal 17357. 17357/12 = 1446.41. 1446.41-1352 = 94.41. 94.41 represents a 6.98% increase in the S&P 500 index and the account would be credited 5% based on the cap. If there had been a decrease between the initial value and the average value then the account would have been credited 0%. A little more complex but still fairy simple.

1 Year S&P 500 Monthly Point to Point with a Cap: 2.50%
Once again, let's assume a contract date of Feb 13th. and an S&P 500 closing value of 1352. Like the monthly averaging method, monthly point to point also looks at the S&P 500 value on the "month-iversary" dates. However, as discovered by KJ's client, there is no downside cap while there is a monthly upside cap. So, if the S&P 500 drops 10% between Feb 13th and Mar. 13th then the account will need 4 months of gains at or above the 2.50% cap to recover the 10% loss. While this method offers the greatest potential for gain (2.50% X 12 = 30%) it also represents a crediting method that is highly susceptible to market volatility.

Ok, so that was more than a quick lesson. At the end of the day, and FIA is not priced to compete with equity market returns. An FIA is priced to provide returns that are 2-3% greater than traditional fixed annuities while providing the same downside protection. [/FONT]

 

[jmarkk1]

What fees are you talking about? Is that their income rider fee? A FIA without a rider doesn't have any fees, unless you surrender it early.

The BAA has fees for each option: A, B, and C

60/40 is 2.45% (although I'm not entirely sure if this fee is annual since the crediting method is 2 yr.)

The BIG question is whether or not the "fee" for these options are worth paying to have no caps and 100% par?

 

[iceco1d]

Ah, thanks Nathan. That's interesting language - I wonder why they would refer to a spread as a fee?

 

[nathan.lee]

The BAA has fees for each option: A, B, and C

60/40 is 2.45% (although I'm not entirely sure if this fee is annual since the crediting method is 2 yr.)

The BIG question is whether or not the "fee" for these options are worth paying to have no caps and 100% par?

Well...let's do some math.

Let's assume the Annexus BAA 10 with $100K, no riders, and 100% allocation into Option A (60% Index/40% Declared at 2.95% annual fee).

We'll compare this to a product with an Annual Pt. to Pt. crediting method with a cap of 4%.

Both indexing methods key off of the S&P 500.

At the issue date of both contracts the S&P 500 is at 1000.

At the first anniversary the S&P 500 is at 1100. (10% gain)

At the second anniversary the S&P 500 is at 1210. (another 10% gain)

Annual Pt. to Pt. with 4% cap: $108,160

Year 1 - Account value is credited 4% which equals $104K (10% increase in S&P 500 subject to a 4% cap)

Year 2 - Account vaule is credited another 4% which equals $108,160 (another 10% increase subject to the 4% cap)

Annexus BAA Option A: $109,460

Year 1 - Account value is not credited

Year 2 - S&P 500 increases 21% (1000*1.21 = 1210)
21% - 5.9% (2*2.95% annual fee) = 15.1%

$60K *1.151 = $69,060
$40K *1.010 = $40,400

Total account value at end of 2 yr. period = $109,460

So, in this scenario where the S&P 500 returns a 10% increase in back to back years the 2.95% fee or spread appears to be "worth it."

Let's look at another scenario where the S&P 500 sees back to back years of 5% growth.

At the issue date of both contracts the S&P 500 is at 1000.

At the first aniversary the S&P 500 is at 1050. (5% gain)

At the second anniversary the S&P 500 is at 1102.5 (another 5% gain)

Annual Pt. to Pt. with 4% cap: $108,160

Year 1 - Account value is credited 4% which equals $104K
(5% increase in S&P 500 subject to a 4% cap)

Year 2 - Account value is credited another 4% which equals $108,160 (another 5% increase subject to a 4% cap)

Annexus BAA Option A: $103,010

Year 1 - Account value is not credited

Year 2 - S&P 500 increases 10.25% (1000*1.1025 = 1102.5)
10.25% - 5.9% (2*2.95% annual fee) = 4.35%

$60K *1.0435 = $62,610
$40K *1.0100 = $40,400

Total account value at end of 2 yr. period = $103,010

So in this scenario the crediting method is not as advantageous.

 

[pbbaseball]

isn't the 2.95 spread just over the 2 yrs? meaning it's not 2.95*2yrs? I agree with everything else though. haven't sold that product in a while, so i might be wrong

 

[nathan.lee]

isn't the 2.95 spread just over the 2 yrs? meaning it's not 2.95*2yrs? I agree with everything else though. haven't sold that product in a while, so i might be wrong

I don't have direct access to the Annexus products so I had to double check with another wholesaler that does because their literature isn't exactly clear. According him him it is an annual fee. I asked specifically..."So at the end of the 2 yr. reset period the fee is actually 5.9%?" and he said "Yes."

If I am wrong...someone please correct me and I'll re-run the numbers.

 

[pbbaseball]

wow, good to know. if that's right, then the math is all good!

 

[Newby]

I don't have direct access to the Annexus products so I had to double check with another wholesaler that does because their literature isn't exactly clear. According him him it is an annual fee. I asked specifically..."So at the end of the 2 yr. reset period the fee is actually 5.9%?" and he said "Yes."

If I am wrong...someone please correct me and I'll re-run the numbers.

That's the way I have always understood it. They also can adjust the fee every 2-years. When the economy was doing better, you could choose the 40% strategy and have a ZERO fee. That is not offered currently. But hopefully if we get back on the right track, things will go back that way.