Getting Real About A Real Alternative Index
Indexed annuities today present a number of encouraging features, from principal protection and lifetime income benefits to the opportunity to capture a portion of the market’s upside potential without being exposed to its downside risk. We’ve seen products offer interest crediting strategies based on a variety of indices, many of which are familiar to both you and your clients. But with the introduction of the new 5 Year Annuity Linked TVI index crediting option available with the Total Value Annuity (TVA) from Security Benefit Life Insurance Company (Security Benefit), we have many producers wondering, “Is it even real – and what can it really mean for my clients?”
The Truth About the 5 Year Annuity Linked TVI Index Account
Not only is the ALTVI derived from an established index, it can offer you a way to add a new and potentially valuable dimension to your clients’ index annuity returns. By providing higher interest credits, clients can in turn receive a higher lifetime income or wealth transfer benefit. For those clients who are earning interest for future or current retirement income, interest on safe principal might spell the difference between retirement success and failure.
In order to understand the Annuity Linked TVI Index, it’s important to know how it was developed. The Annuity Linked TVI Index is derived from another index, the Trader Vic Index™ Excess Return (TVI™ Index). Developed by Victor Sperandeo and EAM Partners L.P., the goal of the TVI is to provide positive returns through diversification and a non-correlated approach to traditional asset classes. The TVI Index is constructed using 24 highly liquid futures contracts across physical commodities, global currencies and U.S. interest rates. The TVI Index tracks the prices of futures contracts in these asset classes, which can be either long or short in an attempt to take advantage of both rising and falling market trends.
Reduced Volatility and Uncapped Interest Potential
The ALTVI shares the same components as the TVI Index with the addition of a volatility stabilizing feature. The volatility overlay increases exposure to the TVI when the TVI volatility is low and decreases exposure when volatility is high. This volatility feature, or “dynamic allocation,” is expected to dampen the daily volatility in the returns of the Annuity Linked TVI Index. By adding this dynamic allocation, Security Benefit can obtain more upside potential from its option budget and offer clients the more compelling values of no interest cap, 100% index participation and no annual spread*. This means the cost of hedging this indexed interest strategy by Security Benefit is less than it would be without this volatility dynamic allocation feature. Again, the TVI tracks the prices of these futures contracts. No annuity premium is invested in these futures contracts. Rather, Security Benefit hedges the ALTVI in the same manner as it hedges the S&P 500 – it purchases a customized call option on the index from a highly rated investment company counterparty.
For indexed annuity agents and advisors, it has been a challenge to find indexed interest options with uncapped interest potential. There are not many such options today. Because the ALTVI index is internally diversified and also features a dynamic allocation process, the cost of hedging the index is better. The ALTVI Index is a 5-year, point-to-point, uncapped crediting option. The ALTVI itself, with the volatility allocation and the 5-year interest calculation term, make it possible to have this option with no cap on the 5-year interest credit. Examining the past 20 years and simulating ALTVI performance shows the possibility of achieving a very competitive interest return.
Diversification Desired and Defined
Other than fixed interest option, index annuity interest formulas today are almost all linked to indices that are equities-oriented1. This means that when equity indices are negative, zero index interest is credited. The only significant diversification previously available has been the fixed interest rate option, and that worked better when fixed rates were higher. There is not much diversification benefit from the fixed interest rate strategy today given declared rates hovering between 1% and 2%. Our challenge is to find a way to increase the likelihood of earning more interest – without taking more risk. Diversification is the technique of blending different asset types within a portfolio. A more diversified portfolio may produce higher returns on average for the same or less risk. Diversification is achieved when the various types of financial products in the portfolio are not correlated. The ALTVI is not an equity index and it is designed to not be correlated with equity indices, so diversification is possible. For example, in 2008 when the S&P 500 decreased 38.49%, the ALTVI instead would have seen a 10.40% increase, based on simulated performance.
For index annuities, the goal of diversification is more consistent returns, greater accumulation and benefit growth, and fewer periods of zero interest credits. Index annuity diversification is achieved by blending index interest options that are not linked to equity indices, and perhaps including a fixed interest rate option. Now, producers can use the TVA with the 5 Year Annuity Linked TVI Index Account as a stand-alone annuity or combine them with one or more other index annuities to achieve this goal. The TVA also offers an S&P 500 Annual Point to Point Index Account and a fixed rate account. The TVA allows producers to construct a more valuable and diversified portfolio of annuity products for clients. For example, with exposure to both the S&P 500 and the ALTVI, clients have the potential to earn higher interest during periods of either inflation or deflation, thereby providing a higher level of retirement planning. Using several products and carriers combined with different crediting terms, you can offer further diversification, more protection and greater flexibility.
Today’s historic low interest rates (which U.S. Chairman of the Federal Reserve Ben Bernanke promises for three more years2) do not allow many index annuities to provide much upside potential because, consequently, fixed rates and indexed rate factors are also historically low. By choosing to work with us for access to our indexed annuity products and marketing support, you can deliver clients the opportunity to earn more index-linked interest credits with full safety of principal. Call your Creative Marketing Annuity Sales Consultant to discuss how you might integrate a story about this index alternative into your practice and add real value to your clients’ retirement plans.
FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 12300 - 2012/5/8 | #88-00001-51
* Depending on market conditions, participation rates and spreads may apply in the future.
**The information in the chart refers to simulated past performance, which cannot be relied on as a guide to future performance. For the Annuity Linked TVI Index, the Least, Median and Best index increase 10-year periods were based on simulated index values as reported by Bloomberg. The Median period is the sixth best index increase out of the 11 10-year periods from 1991 to 2011. It is not the average of the Best and Least increase periods. To determine the Least, Median and Best index increase 10-year periods, no cap, spread or participation rate or vesting percentage, which may apply in determining the Index Interest Rate for the 5 Year Annuity Linked TVI Index Account, were taken into account. Depending on market conditions, a participation rate or spread may apply to the 5 Year Annuity Linked TVI Index Account in the future. Although this product was not available for the period of time referenced above, actual historical prices of the indices were used in this example, which was intended solely for comparative values and is not an indication of the product’s past or future performance.
1 Indexed Sales & Market Report Part 1. AnnuitySpecs, 4th Quarter, 2011.
2 Di Leo, Luca, and Jon Hilsenrath. Fed Sees Low Rates to 2014. The Wall Street Journal, January 26, 2012.
The Security Benefit Total Value Annuity (Form 5700 (3-12) and ICC12 5700 (3-12)), a fixed index flexible premium deferred annuity contract, and the Guaranteed Lifetime Withdrawal Benefit Rider (Form 5720 (3-12) and ICC 12 5720 (3-12)) and Guaranteed Minimum Death Benefit Rider (Form 5721 (3-12)), optional riders available for purchase with the Security Benefit Total Value Annuity and which a monthly premium is charged, are issued by Security Benefit Life Insurance Company (SBL), Topeka, KS. Product features, limitations and availability may vary by state. Guarantees provided under the Total Value Annuity and its optional riders are subject to SBL’s financial strength. To learn more about the features and benefits, including their limitations and restrictions, and applicable charges, please refer to the Total Value Annuity Contract, Income Rider, Death Benefit Rider and Statement of Understanding.
Standard & Poor’s®, S&P®, S&P 500® and Standard & Poor’s 500TM are trademarks of Standard & Poor’s and have been licensed for use by Security Benefit Life Insurance Company. This Product is not sponsored, endorsed, sold or promoted by Standard & Poor’s, and Standard & Poor’s makes no representation regarding the advisability of purchasing these products.
Annuity Linked TVI Index, ALTVI, RBS, The Royal Bank of Scotland and the DAISY device logo are trademarks of The Royal Bank of Scotland Group plc and have been licensed for use by The Royal Bank of Scotland Group plc or one of its affiliates. Security Benefit Life Insurance Company annuities are not sponsored, endorsed, sold or promoted by The Royal Bank of Scotland plc or The Royal Bank of Scotland Group plc. The Royal Bank of Scotland plc and The Royal Bank of Scotland Group plc make no representation and offer no advice with regard to purchasing any Security Benefit annuity. None of The Royal Bank of Scotland plc or any of its officers, employees, representatives or agents accept any responsibility for the appropriateness or suitability of any Security Benefit annuity for any purchaser, the performance of the Annuity Linked TVI Index or any Security Benefit annuity or the accuracy or completeness of this document.
TVI, TVI Index, Trader Vic Index, EAM Partners L.P., and EAM are trademarks of EAM Partners L.P. (“EAM”). EAM created and owns rights to the methodology that is employed in connection with the Trader Vic Index™. RBS has provided a contribution to the Trader Vic Index™ in a limited manner. RBS’s contribution is limited to performing calculations and data distribution in connection with the Index. EAM does not sponsor, endorse, sell, or promote any annuity contract or other vehicle that is offered by third parties and that is based on the returns of the Trader Vic Index™, nor shall EAM be liable for any errors, misstatements or omissions in any communications with respect thereto.
The Annuity Linked TVI (the “ALTVI”) is derived from the Trader Vic Index - Excess Return (or “TVI”). The TVI is a rules-based index that tracks 24 U.S. exchange-traded futures contracts across physical commodities, global currencies and U.S. interest rates on a notional basis. The ALTVI has a volatility control overlay that is adjusted daily based on recent historical volatility, so that more volatility generally leads to reduced exposure to the TVI and less volatility generally leads to more exposure. The overlay may thus reduce or increase the potential positive change in the ALTVI relative to the TVI and thus may lessen or increase the interest that will be credited to a fixed index annuity allocated to the ALTVI relative to one allocated to the TVI (which is not available). The overlay also reduces the cost to hedge the interest crediting risk to Security Benefit Life Insurance Company (“SBL”). As a result, SBL may be able to offer a higher cap, higher participation rate, or lower spread (or potentially no cap, 100% participation, and no spread) on the ALTVI as a crediting option within a fixed index annuity relative to what it would be able to offer with the TVI as a crediting option. The cost for the volatility control overlay and maintaining the ALTVI is 1.25% per annum. RBS collects this daily through an up-front pro rata deduction from the TVI in calculating the ALTVI.
Related terms: Annuities
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