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.