Independent Review of the Security Benefit Total Value Annuity

March 5, 2013 — 34 Comments

What’s Covered in this Review?

In this review I’ll be covering the following information on the Security Benefit Total Value Annuity:

  • Product type
  • Fees
  • Current rates
  • Realistic long term investment expectations
  • How it is best used
  • How it is most poorly used

What you’ll find is that like all annuities, the Total Value Annuity does some things really well. However, there are things some agents might say about its performance that is not entirely true. It’s important you understand the differences, so you can determine if it really is a good fit as part of your financial plan.

For readers who have found my website for the first time and don’t know much about me, I am a fee only financial planner. I don’t get paid to sell annuities nor do I personally sell annuities.  Unlike other fee only planners though, I do think annuities can be a smart part of a comprehensive financial plan when used correctly. Since my compensation is not tied to their sale, I really have no incentive for or against them. This makes my view impartial and objective.

Let’s dig in!

Security Benefit Total Value Annuity at a Glance

Product NameTotal Value Annuity
IssuerSecurity Benefit Life Insurance Company
Type of ProductFixed Index Annuity
Standard & Poor's Rating"A-" (Strong)
Phone Number800-888-2461
Websitewww.securitybenefit.com

Opening Thoughts on the Total Value Annuity

Over the past year, the #1 most requested annuity review from site visitors has been for the Total Value Annuity. Thousands of investors are recommended this product every month as a safe way to grow their money, then turn it into a future income stream for retirement. Most of the questions we get have to do with the 5 Year Annuity Linked TVI Index and the Transparent Value Blended Index – as they are exclusive to this single annuity contract.

For those not familiar, the TVI (Trader Vic Index) is a crediting method that links annuity returns to the 5 year return of the index.  The index itself is comprised of 24 different futures contracts based on commodities, US interest rates, and global currencies. In theory, it’s supposed to be non-correlated to the stock market (i.e., they don’t both go up or down at the same time), and in back-testing provide higher overall returns.

I tested this and my findings are in this review.

In a nutshell, it is different, with returns that are not highly correlated to traditional stock indexes. Used correctly, this can prove to be quite useful as a diversification tool. Unlike other indexes (S&P 500, Dow Jones Industrial Average, etc), the TVI does have a somewhat limited history.  Even the backtested returns only go back to 1990, rather than 60+ years for most other indexes, so we need to understand that it’s difficult to see just how beneficial this index would be in the high inflation era of the late 1960’s to early 1980’s (when commodities type investments would have been great inflation fighting tools).

The Transparent Value Blended Index (TVBI), is a crediting method that links the returns to the 5 year return of that index as well. Like the Trader Vic, it has a somewhat short live history, but does have a backtest available going back to 2000 that can be found at http://tvblendedindex.com. You can also find a very detailed description of the index and access up to date performance information.

The Transparent Value Blended Index is what really makes this product tick, in my opinion. Since it is stock based, it tends to do very well in up markets. However, since it can actively move out of stocks (and aims to avoid stocks that have poor fundamentals) when markets are bad, it also shows a very nice return in historically poor markets.  See the chart below for the full history of the index going back to 2000:

Transparent Value Blended Index Performance

Since many people who are considering this annuity are either in retirement, or close to it – the Guaranteed Lifetime Withdraw Benefit (GLWB) is another feature of interest.  This is an optional rider, and when selected allows for either a guaranteed income for life to be taken immediately, or deferred to a future date based on a “roll up” value.  The way this works is quite a bit different in reality, than the way many agents explain it.  To be clear, it’s a nice benefit – but some people suggest it will allow for 5%-7% (or higher) returns on a guaranteed basis. To be 100% clear, the rider doesn’t work quite that way. It is a great way to build up a guaranteed income base, but the actual return will still be largely driven by the return of the index crediting methods described above.

When using the Guaranteed Lifetime Withdraw Benefit, the longer you can defer taking income, the higher the guaranteed income will be. The income amount is based on an income account value that will grow by “stacking” a 4% base with the index gains. This could grow the income base by as much as 10% annually, but never less than 4%. The actual income amount is then determined by the age of the owners when they take income. Security Benefit has a history of paying some of the highest income amounts relative to income bases in the industry, making the GLWB benefit very popular. The best way to see just how this will work for your situation is to work with an honest advisor and have some illustrations run specific to your situation. If you’d like to see this done, we’ll show how to get in touch later in the review.

Before we get into the gritty details, here’s some legal disclosures…

This is an independent product review, not a recommendation to buy or sell an annuity.  Security Benefit Life has not endorsed this review in any way nor do I receive any compensation for this review.  This review is meant to be an independent review at the request of readers so they could see my perspective when breaking down the positives and negatives of this particular model annuity.  Before purchasing any investment product be sure to do your own due diligence and consult a properly licensed professional should you have specific questions as they relate to your individual circumstances.  All names, marks, and materials used for this review are property of their respective owners.

How Security Benefit Life Describes The Total Value Annuity

A snapshot of the Total Value Annuity base product brochure.

A snapshot of the Total Value Annuity base product brochure.

Per the Total Value Annuity brochure, here are some key points as to how it’s marketed:

  • Accumulation potential with minimal risk
  • A unique interest crediting option – the Annuity Linked TVI Index Account and now the Transparent Value Blended Index
  • Guaranteed income for life
  • Optional death benefit rider to enhance assets passed down to beneficiaries

There’s a few more bells and whistles, but those are the basics.  If you’re looking for the full brochure, you can download it here.

How Financial Advisors Might “Pitch” This Annuity

Since this is a fixed index annuity (FIA) with multiple benefits – there are a few different ways it might be pitched.  My experience, however, is that most agents will cling to two main components:

  1. The safety combined with return potential of the Annuity Linked TVI Index or Transparent Value Blended Index
  2. The guaranteed income for life rider

Some might use the term “hybrid annuity” – which really is just a term some have created to explain an annuity that gives you a form of growth, access to capital, and guaranteed income – all rolled into one.

While those are true statements, this annuity (nor any financial product) is not perfect. It works really well when used correctly, but has shortcomings just like any other financial strategy. One of the biggest issues I’ve run into, is that many agents misrepresent how this annuity will actually perform.  That’s a problem.

From the many people I’ve talked to personally about their experience with agents, most seem to have been told this annuity will perform “better” than other annuities.  I’ve even heard from potential buyers this annuity has a minimum return of 4% per year, but would have produced nearly 10% per year the past 20 years.

Is any of that true?  Not exactly.

If your agent/advisor explains this annuity correctly, you should never get the impression you’ll earn more than 6-8%.  If that’s part of your agents sales pitch – run, don’t walk, to find a more honest financial advisor. It certainly has the potential for upper single digit returns (and could even produce low double digit returns), but could also return less. A lot of the return potential will be determined by how you allocated your deposit in the annuity, so having a good advisor that knows how to best structure the product is paramount.

The Annuity Gator’s End Take on the Total Value Annuity

Where it works best:

  • For producing a reliable, “pension like” guaranteed income stream (so long as GWLB rider is elected, and used shortly after purchase)
  • For producing an income for life that cannot be outlived by a surviving spouse
  • For investors who have a family history of life longevity
  • For producing additional income for home healthcare needs (subject to state approvals and annuity holder qualification)
  • For investors that have no need for their money or generating large returns, but want it to grow safely until transferred to their beneficiaries

Where it works worst:

  • For those who need to have substantial liquidity with their financial assets (this does have liquidity, but just not 100% without incurrent penalties during the surrender period)
  • For those seeking maximum long term growth
  • For those expecting real returns of greater than 8% per year on average (this is possible, but realistically I think the expectation should be more in the 6% to 8% range)

The Total Value Annuity does best what it’s name implies – provides numerous potential benefits, rolled up into one product. Think of it like a swiss army knife – it can do a whole bunch of things, it just doesn’t do any one thing the best if you try to use all the features simultaneously.

In Summary

One of the most important things for investors to understand is that the “roll-up rate” is not the actual return, nor is the “lifetime withdraw rate” the actual return. It has the potential to produce very good returns, but I’ve seen some advisors suggest that better than 10% is realistic. That’s possible, but based on my testing I think 6% to 8% is more realistic if held 10+ years.

For someone strictly looking for guaranteed income with no market risk, you’ll want to make sure you have this annuity tested against numerous others to ensure it’s the right fit for your unique situation. For someone looking for an investment that cannot go down, and won’t need their money for 10 or more years – this might be a very good fit. In fact, it actually does have more “growth” potential than most other annuities on the market today.

My biggest concern with this annuities (and most annuities in general), is that some agents don’t realize what the real return potential is, and significantly over-promise what’s realistic – so be especially wary of anyone who suggests this annuity will work better than how I illustrated it here. If the agents are being upfront and honest, you’ll notice their explanations match very closely (if not exactly) as described in this review.  When that happens, you have an agent you can trust. If you’d like to have us check up on your agent, or refer to one we we know in your area, just click here to reach out via our secure contact form.

As a recap, the Total Value Annuity will not actually return 8% or greater on a guaranteed basis. When financial advisors use those numbers they are referring to percentages used to calculate the income guarantee, and they are entirely hypothetical (i.e., non-guaranteed).  But, it does have the potential to make very good returns and grow more than other index annuities thanks to the potential of the Annuity Linked Trader Vic Index and the Transparent Value Blended Index.

The only way to know if this annuity is a good fit for you, is to have it tested.  We do this free at AnnuityGator.com, so just get in touch with us and we’ll use our proprietary calculator to illustrate for you what returns for your situation are likely to be. If your agent was honest with you, the numbers will match up – if not, well then you might want to reconsider who your agent is.

Have Questions on the Security Benefit Total Value Annuity?  See any Mistakes?

If you have questions please let me know. [You can reach the Annuity Gator via the Free Annuity Help form here]

I know annuities can be confusing and a lot of people are pushing investors very hard to buy them. But you need to know the real facts to make sure if you go that route you don’t end up regretting it later. After all, annuities are long term investments with contracts, surrender penalties, etc. For some people they won’t make sense at all, but for some they might.

If you know anyone who has an annuity or is thinking of buying one, please share this post with them. I know a lot of people are getting very conflicting information and my goal in writing this review and making the video was to educate in an objective way. If you have a Facebook account you can click on the little “Facebook” icon and share this article. That way more people will be able to find it and hopefully more people will benefit.

Thanks for bearing with me on this rather long post, I hope you found it beneficial in your research on the Security Benefit Total Value Annuity.

Lastly, like all humans – I do make mistakes. If you see one on this review please reach out and let me know.  I’m always more than happy to make corrections and give credit where it is due. If you’re an investor and this review causes confusion and creates questions feel free to reach out as well. I can’t always get back right away but usually I can clear up those questions within a few days.

Best,

The Annuity Gator

Jason

Posts

Jason is the founder of AnnuityGator.com and a frequent contributor to the site. He has been breaking down the complexities of financial products for over 12 years with his extreme geekery...and translating them into simple explanations for the rest of us. Jason is a sought after speaker/educator by major financial services companies such as TD Ameritrade and Allianz for his unique expertise in quant finance (see, we told you he was a geek) and social media.

34 responses to Independent Review of the Security Benefit Total Value Annuity

  1. THANK YOU!!! Great review. Very helpful and a big eye opener for us retired folks that don’t know where to get good info on the TVA annuity.

  2. Thank you for this review! I have been searching for two days to find some independent review of this investment type.
    Recently, I was presented with the TVA option by a Financial Advisor. The main sales pitch revolved around the following:
    1. The 0% floor – You cant lose your principal.
    2. That the annuity is uncapped, meaning we could make more than our current annuity (capped currently at 6.5%)
    3. Diversification through the commodities market.
    4. The belief that the overvauled stock market will decline, taxes will go up significantly, and we may experience hyperinflation, all of which would drive gains in the commodity market.

    Ive seen it stated that 18 out of the last 20 years would have resulted in gains through this index based on backtesting, however, the index has declined in recent years. Im not sure what to believe yet but this review is a good start!

    Thanks again.

    • Hi Steve,

      Thanks for visiting the site and asking a few questions. I’ll try to clear those up.

      1) You are correct
      2) Maybe, but not for sure and not highly likely in my opinion
      3) Correct, for better or worse
      4) Maybe, but most people don’t use annuities for speculation – and consider that commodities did NOT go up when we had double digit inflation in the late 1970’s through early 1980’s.

      Backtesting can be dangerous. Yes, backtesting has been good – but real world, live investing has been very bad. If buying an annuity for consistency, dependability, and predictability – then this wouldn’t be a great fit. For those willing to take a few chances though in search of potentially larger gains – it might work (or might not).

      Best,

      -AnnuityGator Team

  3. ok, good video…still somewhat confusing….if, I invest a lump sum, hold for 15 years then take annual income for life, the annual income will not be fixed?….then they take a 1% fee for the lifetime rider ?…..so I have know way of planning on how much income I’ll get each year??…

    • Hi Brian,

      Thanks for visiting the site and your comment/questions?

      The income would be fixed after 15 years, there’s just no way of knowing what that income will be though as it’s based on the combined roll up value of 4% + whatever the index credits are. The fee is charged throughout the contract, not just after income is taken, and is based on the roll up value of the contract (so it most likely will be higher than 0.95% per year). And yes, you are correct, there’s no way of knowing what the income will be for sure – other than the minimum guarantee.

      Hope this helps – and thanks again.

      -AnnuityGator Team

  4. I HAVE NOT (to my knowledge) received your E-BOOK> IF wrong, how do i locate same.

    THANK YOU Barry Snider

    • Hi Barry,

      I just sent a fresh link for you. Let us know if you still cannot get the e-book to download.

      Thanks,

      Jason

  5. You state that you, “don’t know exactly how it will work” (meaning the volatility control, which is basically the entire product). You then continue to say that this is the “best test” we can do with available information. I fail to see how this could be the best test when you don’t do any research to find out what the volatility control practices are that Security Benefit executes. This review trashes the annuity without even understanding how it works.

    • Hi Joe,

      Thanks for finding the site and offering some feedback. I’m afraid, however, your assertions are pretty unfounded.

      You see, the volatility control is not the “basic product” as you point out. The volatility control is a way Security Benefit is changing the Annuity Linked Trader Vic Index to calculate their returns. In other words, the returns aren’t linked exactly to the index. Rather, they are linked to the index after Security Benefit applies their volatility controls.

      Nobody knows how that will work out, as it’s never been done before! The index is very new, and there is no published data anywhere about how the volatility controls will impact the index returns. So, the best anyone can do is illustrate how the index works without the volatility controls. That’s what we did in this review. And just so you know, I did call Security Benefit to find out exactly what their volatility controls are, and could not be provided a specific formula. I suspect they are keeping that information proprietary, but that’s just my guess.

      Either way, this review wasn’t meant to trash anything. It was designed to help people that are thinking about buying it understand how it really works. It may come across rather complicated – but hey – it is pretty complicated. The product has an option to use a relatively new index, and do it in a way no other annuity has before. People should be doing research, and hopefully this little blog post really helps people out. Some may love it, others might shy away. That should be more than okay, as I’m pretty sure no annuity company would ever asset that any one product is right for everyone.

      In the end, The Total Value Annuity isn’t bad. It’s not perfect either. What’s important is that people have a really good idea of how something works BEFORE putting their life savings into it. If it’s too difficult to understand, or if agents to explain it properly, then it’s probably not the best fit.

      Hope this helps. Thanks again for reaching out. We don’t mind one bit if people challenge the data – that’s exactly why we ask for feedback!

      Cheers,

      -The Annuity Gator Team

  6. Good fair review. On caps and the possibility of a carrier raising them I would say a few things. Does it happen? Yeah, sometimes, but not in any substantial way. To a very large extent the pricing on your annuity contract is locked in the day you purchase a contract, just because rates may go up 5 years from now doesn’t mean rates on the bonds backing your annuity will go up as well. That is a very real danger of purchasing a long term contract with rates at an all time low, since your long term annuity contract is backed with long term bonds you are going to be married to low rates for a long term…. Secondly the insurance doesn’t really have an incentive to raise those rates in a substantial way either, like I said you may see a cap go from 3% to 4% but you are never going to see a cap go from 3% to 7% I don’t care how high rates go.

    • Thanks G Higgins – couldn’t agree more. If interest rates go up, initially insurance company bond portfolios (where they invest annuity holders money) will go down. After a few years (or more), they might raise caps a bit, but they will make more profits for themselves if they do it slowly and modestly. It’s easy to forget who the insurance companies are responsible to first: the company shareholders; not the annuity policy owners.

      Best,

      – Annuity Gator Team

  7. john di bartolo June 21, 2013 at 6:55 pm

    Hi Jason let me ask…. in general with these idex linked annuities looking back on testings what would be the best choice in linking an annuity to ? And if one invests in a few what would be a good mix of Index links for future investments, i Thank you and appreciate your response J. D.

    • Hi John,

      Thanks for finding the site and reaching out.

      The best thing to link to greatly depends on a combination of the quality of the issuer (their rating) and the size of the caps. The index is pretty meaningless in my opinion. A lot of the new indexes that are coming out for annuities have only been around a few years, so trusting the future returns will be good just because a agent says they will is pretty dangerous.

      And, in the end, what matters most is whether or not the annuity truly helps as part of your personal financial plan.

      Hope that helps and thanks again!

      Best,

      jw

  8. Jason, a few things about your review:

    1) Although this may be state dependent, you can only select one rider. You can’t select both the income rider and death benefit rider, so obviously you can’t be hit for a fee of 0.95% annually for both.

    2) I believe the 1.25% is charged on the TVI index and is “baked in” to the ALTVI index calculations. I’m not sure if the calculations in your stress test take this out again after ALTVI returns, essentially double charging this fee.

    3) In the brochure it shows how using research from 2000 that 50% of couples who have both spouses alive at age 65 will still have at least one spouse alive at age 92. I’m sure life expectancies have increased since 2000 as well. You base your stress test to age 85 as a “life expectancy” which in my opinion is far too conservative. You should be using age 92 for any average illustration for a joint life expectancy stress test.

    4) Lastly, it’d be kind of silly to invest in this product if you’re going to be contributing half of the assets to an index that’s capped at 3%. The power of this investment is in the (albeit unproven) upside of the ALTVI. This again just shows how your stress test is conservative using a 50/50 allocation, and that a 75/25 or 100% allocation to the ALTVI will show a much higher expectation.

    I did enjoy your analysis though. I didn’t know the actual index has only been around for a few years and that the returns were backtested. Now it makes sense why I couldn’t find a history of more than 5 years anywhere!

    • Hi John,

      Thanks for finding the site and the nicely written comment.

      1) You are correct, you can only select one rider – and it is state dependent. Some states don’t allow the death benefit rider.
      2) I did not take out the 1.25% fee in the stress test as it is included in the index data. There are a few unpublished differences though in the way Security Benefit uses the index, which have an unknown impact on the returns. I suspect those are not good differences, but again, that just a guess. I called Security Benefit and could not get an representative to share any details on their customized use.
      3) Per current Society of Actuaries data the odds of a 65 year old couple having at least one spouse live to age 92 are 33%. The median life expectancy is 23.7 years.
      4) There’s not much power in using an index with no real returns other than losses. As of today, the ALTVI index is down 18% since it’s live (real) inception date of July 2008. Even with the financial crisis of 2008 the S&P 500 is still up more than 25%. In about 1 week the ALTVI will complete it’s first 5 year period and the return will almost certainly be negative. I don’t consider that to be all too impressive. On the flip side, the S&P 500 with no dividends and a very low cap will be positive, producing substantially higher returns than the ALTVI.

      I think it’s really important people understand all the numbers in the brochure are fictional. This is a new(ish) product and the ALTVI has only been around a few years. When it was created, of course the returns would look good the past 1o years – ALL commodities have roared since the late 90’s! It’s really easy to build a product based on the benefit of hindsight and then say “hey, look how good this would’ve done.” Realistically this annuity (and all annuities for that matter) are not likely to produce the returns people see in brochures. Annuities are transfer of risk products that should have very modest expected return with a high degree of safety.

      If after doing diligent financial planning the annuity fits – great. If not, I hope agents learn at some point that misleading investors into thinking they’ll make market like returns with no risk is not the solution.

      Thanks again for the great comment and very good structure. I think a lot of people will benefit from it.

      Best,

      jw

      • Recently I came across an estimate that an equity indexed annuity should give you roughly 2% better than the return of the 10-year treasury over the surrender term of the product. The better ones should outperform this by a bit, and vice versa, but it sounds like a pretty good ballpark. That’s not all that bad when you consider you don’t have any market risk in the product, but obviously like you said it’s situation appropriate.

        • Hi John,

          Thanks for finding the site and posting your comment.

          Care to share where you heard that statistic? I ask because I’ve tested index annuities significantly and based on current structure would say that is definitely not true. Index annuities at best will typically yield at best the same as a 10 year treasury bond, but almost never more. In fact, every single one I’ve tested would yield less, and based on actual data of past index annuities they have averaged about 1% less than a 10 year treasury per year. For example, the past 10 years most actual index annuities have returned about 5%. The last 10 years 10 year treasury bonds have returned slightly more than 6%.

          Always remember that when you give an insurance company money for an annuity, they invest that money. They can only afford to give the annuity holders less than they earn. The investments they buy are typically very diversified, mostly conservative bonds. So it’s fairly obvious that they cannot earn a whole lot more than 10 year treasury’s as that’s one of the main investments they end up using with annuity holder monies.

          Hope that helps – and thanks again for the comment.

          – Annuity Gator

  9. Just to add….your principle is not 100% protected. Maybe from market volitilty, but the fees come out regardless. When you combine that with a 5 year reset, it can be very devastating to a clients cash value if there is no growth and .95 bps coming out. I realize other products work in a similar fashion with fees and charges…but none on a 5 year reset.

    Imagine getting that statement, 5 years down the road, and having to explain to a client why their account value is down 95k (assuming a million dollar policy)?? Regardless of their goal to take income, at the very least it makes them question their decision and it’s a tough conversation to have.

    Something to think about. Great analysis!

    • Hi Patrick,

      Thanks for the comment and the additional info for readers. You are correct, the fees are based on the roll up value so they could be quite a bit more than the actual account growth. Compounded for enough years and the actual surrender value can go down to zero rather fast once distributions start. All the more reason many annuities like this should be planned on as more of an income vehicle than a growth vehicle.

      Best,

      Annuity Gator

  10. So whats the primary difference between Security Benefits TVA and Security Benefits SIA? They seem pretty similar in what the provide, that is tying growth rate to one or combination of Indexes, cups, Lifetime Income options, etc.

    • The big difference is the SIA has a fixed (and higher) roll up rate on the income guarantee. The TVA “stacks” index credits on top of 4% so the income guarantee could either be quite a bit lower, the same, or a bit higher.

      Hope that helps!!

      -Annuity Gator

  11. Patrick Marshall August 1, 2013 at 3:50 pm

    My wife and I purchased one of these last year with 1 million dollars. We were both 60 years old when you bought the investment. Our goal is to start taking money out as lifetime income when we turn 70 basically 10 years after we opened the account. So here’s the way I crunched the numbers. My account got a bonus of 7% or $70,000 the day it opened. The guaranteed income rider grows my income base at a minimum of 4% annually until withdrawals are started. My agent who sold this explained that this is monopoly money, not real but the income it will generate is real. 10 years from now the income value is guaranteed to be $1,583,861 and my wife and I can start taking a withdrawal rate of 5.5% based on our age 70. That’s an income of $87,112 annually. I am expecting my account value to still be somewhere in the $1,000,000 range that I deposited because the fee and low index returns. At that withdrawal amount I will be through my $1,000,000 in 11.5 years and then I will be in the insurance companies pocket so to speak. If the indexes can produce a 2% return annually on average (I think that is reasonable) then that 2% is added to my guaranteed 4% according to my agent and Security Benefit (I checked, they called it stacking) Based on that possibility my $1,000,000 will grow to $1,916,207 and produce an annually income for myself and my wife of $105,391. So I am in the insurance company pocket in 9.4 years. Both my wife and I’s 4 parents are still alive in there late 80’s early 90’s so we have longevity on our side. Have I missed something?
    Now I compared this to having my money invested the more normal way. For us to produce $87,112 in annual income 10 years from now I would need to grow our account from $1,000,000 to $2,200,000 and then withdraw 4% annually + inflation. I would then have about the same income $88,000 (Why 4% well that the magic number that everyone seems to think is a safe withdrawal so we don’t run out of’ money) We figure we stomach having 50% in stocks and 50% in bonds, but no more risk then that. If I purchased $500,000 of 10 year treasuries paying 2.5% I would have earned interest and had a total value in that part of my account of $640,000 after 10 years. That means my stock portion need to earn 10.54% annual to give us the dollars we need. Can that happen I think you said it best a snow balls chance in Ecuador. On the upper side of my number crunch my stocks would have to earn 14.6%. Do I think this annuity indexes can make 2% after fees yes, do I think my portfolio could make 10.5% or 14.5% after fees, no. So for us it was a no brainer which way to invest. As you can see I’m a numbers guy. And I really could care less how it works. Heck I don’t know how the stock market works and I doubt anyone else does either really. We wouldn’t know if this was a good choice until 10 years from now. But I do know that 10 years from now I will be cashing $87,000 checks and that I will get those every year that my wife or I are alive. And hopefully they will be bigger. That make us feel pretty good especially when I look at how the stock market has performed over the last 15 years. I think the stress would kill us if we had to go thru that again.

    Pat
    PS since the S&P 500 index is over a year since we started our return on that 1/2 of the investment (the other half went into the 5 year index) was up 1% even after fees so this year out income base increased 5% not 4% so we are already ahead of the guaranteed amount.

    • Hi Patrick,

      Thanks for the great comment and feedback.

      You are correct that worst case scenario (so long as Security Benefit is in business, which I think they will be) you’ll get $87,112 per year. And more than likely it will be more, probably about what you calculated with the stacked growth. The only thing you didn’t consider in your comparison was that you really wouldn’t need to grow your money to $2.2 million in order to take 4% distributions. In the annuity, most likely there will be no value left when you pass. So to compare apples to apples you’d need to just make enough on your investment to pay back your original investment and get income until death.

      Or course, since we don’t know how long we’ll live, that can be tricky. Assuming either you or your wife live until 100, here’s the real numbers you’d need to achieve to get at least the same results as the annuity using both the minimum guarantee of the annuity and the optimistic case (the 6% via stacked roll up).

      Example #1 – Only guaranteed annuity returns:

      Return 4.04%
      Age Year Account Value Distribution
      60 0 $1,000,000.00 $-
      61 1 $1,110,407.27 $-
      62 2 $1,155,275.79 $-
      63 3 $1,201,957.33 $-
      64 4 $1,250,525.14 $-
      65 5 $1,301,055.44 $-
      66 6 $1,353,627.53 $-
      67 7 $1,408,323.92 $-
      68 8 $1,465,230.44 $-
      69 9 $1,524,436.40 $-
      70 10 $1,498,922.71 $87,112.00
      71 11 $1,472,378.08 $87,112.00
      72 12 $1,444,760.85 $87,112.00
      73 13 $1,416,027.69 $87,112.00
      74 14 $1,386,133.50 $87,112.00
      75 15 $1,355,031.37 $87,112.00
      76 16 $1,322,672.48 $87,112.00
      77 17 $1,289,006.06 $87,112.00
      78 18 $1,253,979.27 $87,112.00
      79 19 $1,217,537.15 $87,112.00
      80 20 $1,179,622.50 $87,112.00
      81 21 $1,140,175.82 $87,112.00
      82 22 $1,099,135.20 $87,112.00
      83 23 $1,056,436.25 $87,112.00
      84 24 $1,012,011.96 $87,112.00
      85 25 $965,792.59 $87,112.00
      86 26 $917,705.63 $87,112.00
      87 27 $867,675.61 $87,112.00
      88 28 $815,624.01 $87,112.00
      89 29 $761,469.15 $87,112.00
      90 30 $705,126.03 $87,112.00
      91 31 $646,506.25 $87,112.00
      92 32 $585,517.80 $87,112.00
      93 33 $522,064.97 $87,112.00
      94 34 $456,048.19 $87,112.00
      95 35 $387,363.85 $87,112.00
      96 36 $315,904.17 $87,112.00
      97 37 $241,556.99 $87,112.00
      98 38 $164,205.65 $87,112.00
      99 39 $83,728.75 $87,112.00
      100 40 $(0.00) $87,112.00

      Example #2 – Using 6% roll up (4% base + 2% stacked growth):

      Return 4.97%
      Age Year Account Value Distribution
      60 0 $1,000,000.00 $-
      61 1 $1,119,657.21 $-
      62 2 $1,175,256.26 $-
      63 3 $1,233,616.21 $-
      64 4 $1,294,874.14 $-
      65 5 $1,359,173.98 $-
      66 6 $1,426,666.77 $-
      67 7 $1,497,511.06 $-
      68 8 $1,571,873.27 $-
      69 9 $1,649,928.11 $-
      70 10 $1,626,467.94 $105,391.00
      71 11 $1,601,842.80 $105,391.00
      72 12 $1,575,994.84 $105,391.00
      73 13 $1,548,863.34 $105,391.00
      74 14 $1,520,384.57 $105,391.00
      75 15 $1,490,491.63 $105,391.00
      76 16 $1,459,114.28 $105,391.00
      77 17 $1,426,178.82 $105,391.00
      78 18 $1,391,607.88 $105,391.00
      79 19 $1,355,320.25 $105,391.00
      80 20 $1,317,230.67 $105,391.00
      81 21 $1,277,249.67 $105,391.00
      82 22 $1,235,283.32 $105,391.00
      83 23 $1,191,233.04 $105,391.00
      84 24 $1,144,995.35 $105,391.00
      85 25 $1,096,461.62 $105,391.00
      86 26 $1,045,517.85 $105,391.00
      87 27 $992,044.34 $105,391.00
      88 28 $935,915.50 $105,391.00
      89 29 $876,999.45 $105,391.00
      90 30 $815,157.79 $105,391.00
      91 31 $750,245.26 $105,391.00
      92 32 $682,109.34 $105,391.00
      93 33 $610,589.99 $105,391.00
      94 34 $535,519.18 $105,391.00
      95 35 $456,720.57 $105,391.00
      96 36 $374,009.04 $105,391.00
      97 37 $287,190.28 $105,391.00
      98 38 $196,060.35 $105,391.00
      99 39 $100,405.16 $105,391.00
      100 40 $(0.00) $105,391.00

      As you can see, in order to match the guaranteed rates your investments would need to grow at an average rate of 4.04% over a 40 year time period. For them to match the returns of the optimistic annuity returns you would need to average 4.97% over a 40 year time period.

      For comparisons sake, just using the worst ever 480 consecutive months (40 year time period) of the last 90 years a conservative portfolio invested 80% in fixed income and 20% in growth investments would have returned 4.44% (source: indexfunds.com years 1930 to 1970 IFA P10). The average would be 7.87%.

      So it’s possible that the worst ever 40 months in history would be slightly worse than an optimistic comparison of the annuity, but only if either you or your wife lives to age 100. If the life expectancy is age 95 than even in the worst ever non annuity scenario you are better off than the optimistic annuity scenario. Keep in mind too that a conservative portfolio like I’m comparing the annuity to would never have produced a loss over any 4 year period, something the annuity cannot claim as the surrender penalties technically make the annuity a loser for the first few years.

      Statistics aside, the annuity sounds like a good fit for you. You don’t need to worry about much and know what you’ll get in return. A better plan might have been being more diversified or using a different annuity/combination of annuities (there are annuities that have better “worst case scenario” incomes). Everyone is different, though the saying “don’t put all your eggs into once basket” apply to all of us.

      The most important thing is to have your money invested where it meets all your needs and you truly feel very comfortable. It sounds like you’ve found something that does that for you, which is great.

      Thanks again and best to you and yours,

      -Annuity Gator

  12. With Transparent Value Website and other sources showing the transparent blend is up about 10% for the year and knowing the annuity has a .5% spread, and if an income rider is selected there is another .95% fee. Do you still agree with your former comments such as the bond portfolio etc makes insurance companies only 5-6% so the returns to client will be less.

    Please educate me on why not to think the annuity is up about 9.5% for the year. If rider is added take a fee off of .95 but add 4% after the 10% bonus, What am I missing?

    Dan

    • Hi Dan,

      Thanks for finding the site and adding the comment.

      The Transparent Value Blended Index’s live inception date for inclusion in the Total Value Annuity was late June, 2013. So it doesn’t have a YTD return of 10% just yet. Since being an actual option on the annuity it is up a touch more than 3%.

      That said, if it were around all year it would be up about 11% YTD in 2013.

      The really, really important thing to remember, though, is this crediting method requires 5 years to “lock in” the gain. So what it does in the first year is rather inconsequential. If it goes down 10% next year then all of the first year gains would be wiped out and the only returns for annuity holders (on this index, anyways) would be the returns in years 3-5. Those could be great, average, or poor. Nobody really knows. It’s also important to note annuity holders will not use the TVBI for 100% of the index credit allocation (I’ve seen most blended with the ALTVI and S&P 500 options).

      I actually really like the index and the return potential of the annuity. Being uncapped provides much better upside potential than many other fixed index annuities. The problem is when people assume it has 10% annual return potential. This is highly unlikely, and if it were to happen could actually be difficult for the insurance company to actually payout and remain profitable long term. The reason is the very reason I’ve pointed out in the post (and you bring up in your comment): An insurance company will have a hard time getting a 10% return on the money in today’s low interest rate environment. Obviously, if they have to pay out to annuity holders more than they can earn investing the money – the insurance company goes backwards. They can’t do that perpetually and stay in business.

      So, as said, I do like the index and the potential for annuity holders. I just cringe when I hear stories from investors that they are led to believe they can make 10% or greater returns with this (or any) annuity. Annuities are designed to be “safe money” investments and should not be compared to aggressive growth-type investments. If used correctly they do a great job of being part of the fixed, or income producing (now or deferred for later) pieces of a well diversified financial plan.

      Hope that helps and thanks again for adding to the discussion.

      – Annuity Gator

      • It is my understanding that fixed indexed annuities are buying an option that if the stock market goes up they can cash in the option? In this case a 5 yr option tied to the growth of the “Blend” index. Therefore they then are not paying the potential high returns from their operating or investment funds but get the funds from cashing in their options?

        • Hi Dan,

          This is only partially true. If you look at most insurance company websites, they’ll actually report what is in their investment portfolio (the funds of annuity holders). The vast majority of the money is invested in high quality bonds (in many cases, mostly government bonds). Some of the return from those bonds is used to buy options on various equity markets as a means to hedge risk against equity index annuity participation rates. This doesn’t work entirely, however, which is why many companies substantially reduced participation rates for index annuities as interest rates dropped from the early 2000’s to 2013. The cost of the options also has increased, which is one of the reasons some companies are using 5 year options in lieu of 1 year options for interest crediting.

          Hope that helps!

          – Annuity Gator

  13. Thanks for the detailed post and video, and for the subsequent follow ups to comments.

    A few questions/comments:

    1. You mention not knowing the effects of the volatility overlay, but a brochure I have called “ALTVI Explained” (https://www.sbelitepartners.com/media/73768/tva_altvi_brochure.pdf) has in small print on the back “The cost for the volatility control overlay and maintaining the ALTVI is 1.25% per annum.” There is other verbiage that also indicates that both the RBS fee and the results of the volatility overlay are already baked into the ALTVI index and its backtested data (www.bloomberg.com/quote/ALTVI:IND). Am I missing something?

    2. Can I get a copy of your spreadsheet?

    3. With the TVBI now available, the trend seems to be recommending equal allocations between the S&P, ALTVI, and TVBI options (1/3rd each). There is a least, median, best evaluation using that allocation back to 1994 with the income rider located here: https://www.sbelitepartners.com/calculator.aspx. Regardless of the details entered, you get a 10 year effective rate of return. My advisor indicated if you just want to look at the performance, you could subtract 3% from the 10 year numbers across the very bottom (+4% is there for income rider rollup, but -0.95% is there for rider fee). That seems to indicate that worst 10 years back tested to 1994 was ~5%…best was ~7.7% (again…assuming no income rider…just trying to look at it compared to other mutual funds, as I am young and can’t enact the riders yet). It’s not clear to me if the spread is taken into account in those numbers, or even if the whole idea of crediting over 5 years pt to pt is taken into account in their least/best calcs. Maybe the better way to look at it is via your spreadsheet and setting the rider fee to 0%? Thoughts/comments (other than take back tested data with many grains of salt…understood)?

    Thanks again for your time…I appreciate your efforts at educating us on these complicated topics.

    • Hi Malcolm,

      Thanks for the positive feedback! I’m happy to answer your questions.

      1) The fees of the volatility overlay are clear. What’s not disclosed is the formula used to determine the use of the volatility overlay. If you look at the same brochure you linked to – you’ll see that Security Benefit will adjust the percentage allocation to the ALTVI based on volatility. Some times it will be 100% the same as the index, other times a much lesser %, and other times as high as 150% of the index. This makes it tough to know exactly how the actual annuity returns are linked to the ALTVI.

      2) Sorry, but we don’t give our our spreadsheets. If you’re good with MS Excel, however, you could recreate it without too much trouble.

      3) With the TVBI this is definitely a better product than it was before that crediting method arrived. It’s still too early to tell, however, if the backtested results will be anything like the actual results. That’s not a TVBI think – it’s the case with any backtest (past performance is never a guarantee of future results). So long as the spread and cap stays where it is today, I do feel this will do better than most other annuities. That’s just my opinion though ;).

      Hope that helps – and thanks again for the great comments added to this post!

      -Annuity Gator

      • Thanks for the quick reply Jason.

        2. Interested in why you don’t share spreadsheets…if you’re willing to disclose. I am good at Excel, but I’d rather not have to take the time to start from scratch. As you mentioned…you have an advanced degree in math and it took you a while to figure out how to run the calcs.

        3. Can you address interpretations of the returns posted at the link https://www.sbelitepartners.com/calculator.aspx? Can we just subtract 3% to get a comparison to mutual fund returns (no riders)? Does it look to you like they take the spread and 5 year crediting method into account? Would you be willing to make a modified version of your spreadsheet that tries to mimic their calcs to compare results..then set rider fee to 0% to see if the 3% subtraction works out?

        • Talked to a guy that helped create the TVA for Security Benefit & found out some more info about the calculator that might be useful to others: https://www.sbelitepartners.com/calculator.aspx

          1. If you just want to look at accumulation (no riders), make the appropriate selection on the inputs of the calculator.
          2. All results are net of the spread (fees), and have to be updated if the spread changes. I think this holds true for participation rate too (which is currently 100%).
          3. All results take the 5 year pt-pt nature of the ALTVI and TVBI into account.
          4. All results include the deposit bonus.

          Looking at my particular situation, the most recent 10 years would have returned about 4.5% in a 1/3rd blended TVA account. My current portfolio (2 IRAs and 2 Roths) has done about 6%-7% in the same time period, so it would have cost me ~1.5%-2.5% in opportunity cost lost due to the more conservative nature of the TVA and the spread. That being said, if you look at the least (~4%) and best (~6.5%), the last 10 years is on the low end of what the product could do, and I expect there to be some cost associated with the downside protection involved in this product.

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