Introducing a New Fixed Index Annuity Designed by RIAs, for RIAs
A 60/40 portfolio – 60 percent equities and 40 percent fixed income and cash equivalents – is often considered an appropriate benchmark for a balanced growth portfolio. In a rising interest rate environment, however, fixed income investments could see a loss in value as bond prices move inversely. This is one reason retirees may turn to advisers for stronger fixed income solutions to protect their nest egg and provide lifetime income.
Security Benefit recently introduced ClearLine Annuity, an innovative, commission-free fixed index annuity (FIA). Designed specifically for RIAs and their clients, and available exclusively through DPL Financial Partners, ClearLine offers a solution for protecting assets and guaranteeing lifetime income for clients nearing or in retirement.
We believe annuities can be a core product offering for RIAs who are looking to provide reliable asset growth and retirement income for their clients. DPL is an ideal partner, as they focus on bringing low-cost, commission-free insurance solutions to RIA practices.
RIAs have typically shied away from annuities for two key reasons: they are too complex and too expensive. Commission-free options for fee-only advisors are a possible option, and a handful of providers have, in fact, introduced these instruments. However, the concept has yet to take off. Although sales of fee-based variable annuities jumped 43 percent year-over-year to $800 million in the third quarter of 2018, they still represent only three percent of the market, according to the LIMRA Secure Retirement Institute.
DPL regularly gauges sentiment from its RIA membership and business partners about annuity product features and design. In response to this feedback, we developed ClearLine from the ground-up, and launched it in January 2019. Intended for consumers who work with RIAs and fee-only advisors, ClearLine offers a simplified product structure and combines a powerful retirement savings and income solution; an optional rising income for life feature; and automatic payout increases.
ClearLine offers the following advantages:
- Some market participation, no market downside. ClearLine protects savings from all market risk while providing the opportunity to benefit from market upswings.
- Tax-deferred growth potential.
- Income that will last. The optional Rising Income Rider guarantees income payments in retirement that may increase every year – for life.
- The ability to manage how income is taxed. ClearLine’s Income Power option for non-qualified contracts may provide higher after-tax income earlier in retirement than typical withdrawals.
Mitigating Retirement Savings Risk—ClearLine is also a potential bond alternative
ClearLine offers the option to receive a declared interest rate along with the option to allocate to accounts that credit interest based on part of the change in one or more benchmarked market indexes. While ClearLine offers competitive caps, spreads, and participation rates, like other FIAs, these can limit upside participation. However, it absorbs all downside risk, regardless of how well or poorly the benchmarked financial indexes perform. Account values grow as the index grows, but don’t lose value with market downturns, which can be a critical benefit for consumers seeking to insulate their portfolios from market loss near or in retirement.
What’s more, ClearLine may be an attractive bond alternative. Unlike bonds, money in ClearLine isn’t taxed as it grows. Consumers pay taxes when funds are withdrawn, much like other tax-deferred instruments. In addition, ClearLine offers other benefits that bonds don’t:
- No bond default risk. When a bond is purchased, the buyer is subject to the risk that the bond issuer could be unable to make their required payments. ClearLine doesn’t have the same risk as the principal is guaranteed.
- No potential loss of principal in a rising rate environment. When interest rates rise, bond prices typically fall, which devalues the initial investment. Again, ClearLine protects principal even as interest rates fluctuate.
RIAs can choose from four crediting options to help grow client account values, including a fixed account and three index accounts based on the performance of either the S&P 500® Index or the S&P 500® Low Volatility Daily Risk Control 5% Index. The Fixed Account provides a predictable rate of interest as we credit a daily interest rate that is guaranteed to be no less than the contract’s Guaranteed Minimum Interest Rate (GMIR) for each contract year.
The three index accounts provide the potential to earn higher interest credits than the Fixed Account.
1. There are two crediting options linked to the S&P 500® Index
- With one, a positive percentage change in the index from one contract anniversary to the next is credited, up to a cap and without dividends, as interest on the amount allocated to the account. Currently, contract owners can receive 100 percent of the S&P 500® Index growth up to a 7.5 percent annual cap (7.75 percent for those with purchase amounts of $500,000 or more).
- With the other, interest is calculated based on the sum of the capped monthly changes in the S&P 500® Index value for the contract year. A positive one-month change in the Index, subject to the monthly cap, increases the annual sum. A negative one-month change is subtracted in full from the annual sum. There is no floor on a negative change for a month. The positive sum of the 12 capped monthly Index returns is credited as interest. Currently, the monthly cap is 2.5 percent (2.6 percent for those with purchase amounts of $500,000 or more).
2. The crediting option linked the S&P 500® Low Volatility Daily Risk Control 5% Index is based on a total return index (with dividends) designed to measure the performance of the 100 least volatile stocks within the S&P 500®. This index account has a 50-basis-point annual spread on the change in the S&P 500® Index (30 basis points for those with purchase amounts of $500,000 or more).
Optional Rising Income Rider Provides Guaranteed Lifetime Income
Unlike insurance policies that provide for beneficiaries upon the purchaser’s death, ClearLine turns the owner into the beneficiary of protection against outliving their retirement income. With the Rising Income Rider, your clients can retire with the confidence of income they can count on for life – and see increases every year.
ClearLine is structured so that withdrawals taken to satisfy Required Minimum Distribution (RMD) requirements during the income phase will not negatively impact future annual income amounts. The initial annual income amount is calculated by multiplying the account value by the Base Annual Income Rate (withdrawal rate), based on the owner’s age and whether they are receiving a single male/female or joint payout. Beginning in their second income year, and each year thereafter, the annual income is increased by two percent.
ClearLine also offers an elective withdrawal feature for non-qualified contracts that may reduce the upfront tax burden for some retirees by spreading the taxable gain portion of the income payments over a longer time period. This can provide higher after-tax income earlier in retirement than typical income rider payments (additional withdrawals may reduce future income payments). Typical income payments first come from gains, which are fully taxable, and then from the account’s cost basis (principal), which is not taxed. With the Income Power election, the income payment is withdrawn from both gains (taxable) and cost basis (tax free) utilizing an “exclusion ratio.” This acts to spread out the tax on the income payments, instead of all of it hitting early in retirement.
At its most basic level, we believe ClearLine is a fixed income replacement, with bond-like performance or better, and downside protection. It may be most suitable for conservative clients nearing or in retirement who want an asset that is less risky than stocks, protects principal, and provides lifetime income that retains their purchasing power.
As traditional pension plans become increasingly rare, and a rising rate environment jeopardizes the value of many fixed-income investments, retirees will likely continue to demand more – and better – guaranteed income strategies from their advisors. With ClearLine, RIAs can provide greater growth opportunity and lower risk, which may be the optimal solution for many clients.