We are seeing more and more Variable Index Annuity cases come through the door as time goes on and uncertainty in the market increases. If you are not familiar with these types of contracts, many of them provide clients with an opportunity for market participation, a buffer against losses, and zero fees. With many clients feeling concerned about volatility and a possible recession during 2020, the iron is hot, and their ears are open.
The Variable Index Annuity product that has been seeing the most action from our financial professionals is the Brighthouse Shield product. The Shield contract can be constructed in a variety of different ways by choosing from three term durations (1-yr, 3-yr, 6-yr), three Indexes (S&P 500, Russell 2000, MSCI EAFE) and three levels of downside protection (10%, 15%, 25%). Because this is a variable index annuity, you do have some upside limitations and those limitations are dictated by what level of downside protection that you choose. This can start to sound a little confusing, so please stick with me. It is actually quite simple when the pieces come together.
If we were to go with the 6-year term and select 10% downside protection, the upside limitation would be 200% over the 6-year term. What Brighthouse is saying here is that if we put $100K into an account and it goes up to $300K over the next 6 years, we get to keep all the gains. If it goes to $310K, we get to keep $300K. On the downside, if over the next 6 years the contract goes to $90K, Brighthouse eats all those losses and your client will get their $100K back. If it goes to $85K, then your client would have a $5K loss because Brighthouse is only absorbing $10K of that loss in this example.
Another option that the Shield contract has that I think is pretty cool is their “step rate” option. The step rate option can be put on the 6-year or 3-year Shield contract and it is a 1-year term option that currently gives you 10% protection each year with a 7.5% cap. The cool thing about this option is that as long as the client’s return for the year is above 0.00%, the client will get a “step up” to the 7.5% cap for that year. So every year of the contract, the client gets 10% downside protection, and if the returns were above 0.00%, they will be locked into a 7.5% return for that year.
As I mentioned above, the Shield product is becoming more and more popular for financial professionals that have mutual fund clients that are concerned about the volatility in the market but still like the idea of market participation with the addition of downside protection and no fees. It has also shown to be a good fit for clients in fixed annuities, fixed index annuities, and bond funds that are looking for a little more in returns than they are currently getting while maintaining some downside protection.
If you would like to talk in more detail about this contract, the different options available, or potential opportunities, please give me a call. Also, I have attached a link below to the Shield website where you can learn more about the product and see current rates and design options.
Contact Micah Hesting for more information:
Relationships/Business Development Strategist