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  • Writer's pictureSunil K Pai, CFA

New Twist on Annuities, With a 5% Match

Insurance annuities. Never thought we would write about them but we came across an interesting annuity twist that can make sense to some long -term investors as a "core" holding but with an alternative-like risk flavor and a 401K-like match.

Here is how it works:

1) Choose a benchmark index that is in line with your needs, let's assume the equity one with 75% participation

2) Decide on how much to invest into the annuity

3) Annuity immediately pays to your account 5% of the amount invested, like a 401K match, for all contributions in the first 8 years

4) Take out up to 10% of amount invested annually without penalty

5) Take out 100% of annuity cash value with small declining penalties over the first 10 years

6) Participate 75% in upside of equity market move ONLY, no losses even if equity market goes down; so if benchmark index goes up 10%, you get 7.5%, if it goes down 10%, you lose 0%

7) Fund with IRA-qualified money and maintain tax deferred status or Roth IRA and get tax free withdrawals

8) Death benefit of annuity goes to your loved ones

Overall, it ends up looking like a 4-4.5% annualized return to the investor with no downside (insurance company AMBest A-rated too) and a fair amount of liquidity. Picking the equity-based index also provides a buying power hedge (via equity exposure) that you would not get if you simply bought some long dated bonds. And, with that 5% cash kicker on your contributions, just like your typical 401K matching program, you get an immediate boost to your overall returns by making contributions.

Is this for everyone? Probably not, but note that the key here is that an insurance company has a large pool of investors to offset all the costs of administering a program like this over long periods. A typical asset manager (like us) has no such pool and so you bare all the risks but also get all the upside.

So, as an asset manager, this would not be our first choice, but if we are able to abdicate the risk of equity investing and get those 5% matches and maintain a fair amount of liquidity, it is easy to find a place for such an investment in our portfolio while providing for our retirement needs and sleeping better overall. It can take more of a foundational flavor to our retirement investing.

Contact us for more individualized discussion and analysis on such a product and how it can work for you. Our fintech tools can give you the answers.

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