There’s always new annuity products coming out, some different, some the just rehashes of the same old stuff. One new thing that’s popped up recently is the Transparent Value Blended Index as a crediting method in the Security Benefit Total Value Annuity (TVA). We’ve published an in-depth review of the TVA you can find here. That review, however, was made before this new index.
So let’s dig in, and see if the TVBI is going to make a big improvement.
Transparent Value Blended Index: Better than Sliced Bread and Power Steering?
This new crediting method is based on a new index. The general principal of the index is to avoid stocks that do not have a high probability of reaching certain sales/revenue goals in order to justify their current share price. In other words, avoid the stocks that could go down in price.
On the surface this is a good idea. The downside, of course, is that’s the very thing thousands of money managers have been trying to do for a hundred years (mostly failing). When looking at a crediting method, always be careful. Some agents don’t always do a great job of explaining how they work. Worse, some will suggest returns are possible, that simply are not.
Case in point – here’s a comment we recently received here on our blog:
Subject: Total Value Annuity
Agent I spoke with indicated potential of 8-12% returns with the Security Benefit Total Value Annuity. Can you address this?
Short answer – potential for and realistic expectation of 8-12% are two very different things.
Part of the reason agents make return assertions such as that is due to the “backtesting” of indexes that don’t have much actual history. In the case of the Total Value Annuity – it has the Trader Vic Annuity Linked Index as well as this new Transparent Value Blended Index (plus more traditional crediting methods using indexes such as the S&P 500). Both have excellent backtested returns, but very limited actual history.
Here’s the live history of the Transparent Value Blended Index:
As you can see, the index has only been around for about 4 months. So if an agent suggests by linking your returns to this index gives the potential for 10%ish returns – just call their bluff. There’s no actual performance to substantiate such a claim, and in reality, the S&P 500 has actually done better in this short time period.
To be fair, Annuity Gator actually does like this index and this crediting method. It has great potential. What you need to be careful with though are dishonest agents that try to tell you this index has really good long term returns. It doesn’t have long term returns. It has potential to generate good returns, and that’s where the conversation should end. A good, honest agent will be clear to point out there are some limitations (holding period to earn interest credits) and that is why there is also good potential.
Simple Fact about Index Annuity Returns
Index annuities can actually be a great part of a retirement income plan. Unfortunately, they do not produce big returns (8%-12% for example is very unrealistic). That’s not what they were designed for. Rather, they produce modest returns (2% to 5% on average) with very little risk. They can also have riders that guarantee lifetime income, which can be helpful for some retirees (though the real returns on those riders is usually 0%-4% – even though many agents will say otherwise).
What it boils down to is this:
When you give an insurance company money for an annuity, they invest those dollars on your behalf. They are required to have most of the money very conservatively invested. As a result, they might earn 3% to 6% on the money you give them in today’s low interest rate environment. In the future, they may be able to earn a higher return, but that could take quite a while to materialize.
From that 3% to 6% return they need to cover their operating expenses, pay the annuity holder benefits, and produce a profit for shareholders. On average, most insurance companies have about a 30% gross profit margin. This means that they can only pay the annuity holders 70% (or so) of the returns they make after investing your money.
It doesn’t matter what crediting method you choose – your money is not actually going into any index. It’s going into a very diversified, conservative portfolio managed by the insurance company (or company the insurance company hires for management).
As a result, regardless of how fancy any index crediting method sounds – the likely returns to the investor is most likely going to be in the low to mid single digits. If it sounds too good to be true (big returns with no risk), then it probably is.
To reiterate a point made up above: Annuity Gator does like the potential of this index and how it works with some of the riders on the Total Value Annuity. Just beware of the agents that only paint unicorns and rainbows. No annuity or index is always right for all investors. The most important thing is having realistic expectations – and that with those expectations your financial needs are met.
Have Questions About This Annuity?
If you’re thinking of using this annuity, make sure to reach out. You can contact us via our secure contact form and get questions answered within 24 hours via email. Nobody will be calling you over the phone or trying to sell you anything. Just a little free help to point you in the right direction.
One thing many of our website visitors find really helpful is sharing how this (or other) annuity is trying to be sold to them. We then peel back the layers and show you how it really works. In the end, if it’s a good fit, you’ll know. If it’s a lousy fit, you’ll be glad you found out before locking your money up for a long term.
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The Annuity Gator Team