Fintech executive, writer, math geek, and investment systems developer. Founder and CEO of Altruist and Founder of FormulaFolios.

An Independent Review of the Aviva Balanced Allocation Annuity 12 (BAA12)

An Independent Review of the Aviva Balanced Allocation Annuity 12 (BAA12)

A couple weeks ago I reviewed an annuity (the Security Benefit Secure Income Annuity) that has become quite popular over the past year or so and got some very interesting feedback.  Most of the feedback was very good, but there were a few negative emails as well.  The negative email came from some insurance agents around the country that didn't like that I singled out an annuity and openly reviewed how it works, what reasonable expectations should be for those contemplating buying it, and some of the mis-truths some advisors might use to get investors to buy in. So much for full disclosure being good for investors.

Focusing on the positive responses, which were much greater than the negatives, I've decided to occasionally do independent annuity reviews of other popular products just so there is at least one truly independent voice explaining the real pros, cons, and inner workings of these rather complicated financial products.

Today I'll be reviewing the Aviva Balanced Allocation Annuity 12 (BAA12).

Before I dig into the review let me clear the air with a little legal disclosure:

This is a review, not a recommendation to buy or sell an annuity.  Aviva 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.

Let's begin.

The Aviva Balanced Allocation Annuity is a bit more complicated than the Security Benefit Annuity I reviewed a couple weeks ago in that it has multiple crediting options and more riders available.  For the sake of simplicity I reviewed just one of those options, called Option A.

Option A in the Balanced Allocation Annuity provides a S&P 500 linked growth method for calculating 1/2 of the annuity return and a 1% fixed account for the other 1/2 of the annuity return.  These percentages can change should the insurance company need to do so and the 50/50 mix is only current as of January 2012.

The way earnings are credited to the annuity are as follows:

  • For the S&P 500 linked portion the contract looks at 2 year time periods for crediting earnings. So if purchased today an investor would need to wait 2 years from their purchase date and if the S&P 500 is up 10% - then the annuity would credit 5% of earnings before fees. This excludes dividends of the S&P 500 like most index annuities when calculating the portion of return linked to the market.

  • For the fixed portion of the contract the current rate is 1% per year, which is also the current minimum rate. So using the example above after 2 years there would be an additional 1% (1% per year x 50% of the account value) added to the 5% credited based on S&P 500 gains.

But that really only tells part of the story because those are gross returns - i.e., before fees.  And the Aviva Balanced Allocation Annuity 12 can have some pretty hefty fees if all the riders (extra benefits) are added onto the contract.  The fees for this indexed annuity are as follows:

Base cost for Option A - 2.95% per year 6% bonus rider - 0.95% per year Guaranteed income rider - 0.95% per year Death benefit rider - 0.6% per year

One thing I couldn't find in print anywhere were if these were annual fees or semi-annual fees.  The reason I bring this up is because this annuity only pays interest (or credits) every 2 years.  Because of this I believe the fees are only charged every two years - but they might be each year.  Either way they are fairly high if all riders are elected.

For full descriptions of what these riders are and how they work just refer to the video overview I recorded below as well as be sure to read all the promotional literature from Aviva, the Statement of Understanding, and certainly review the contract should you already own one.

When fully loaded up with riders the costs of the annuity can get up above 5% - which is quite a lot.  That being said, you only pay these fees if your earnings are higher than the sum of the fees.  In other words, it can't produce a negative return because of the fees - they only reduce returns by as much as the total fee when the return would have otherwise been above zero.

Like all annuities I've reviewed there are positives and negatives.  The positives are that if you really are a long term investor (12 years or longer time horizon) than you are guaranteed by the insurance company (based on their claims paying ability) to not lose money.  Because of the volatility and the number of really bad years in the stock market since 2000 that is important for some investors.  Plus if you choose the guaranteed income rider (called Income Advantage on this particular annuity) you are also guaranteed an income stream for as long as you and your spouse (if applicable) live.

The negatives I think are more based on the way this and other annuities like it are sold. Many agents go to great lengths to give the impression this will get "market like" returns.  That's just not true.  If you watch the video I made on this you'll see that based on current contract rates and fees over the last 60 years the average annual return is in the 3.5% neighborhood depending on the riders chosen.  So if someone is buying this annuity they should know that the liklihood of getting more than 5% average return is very, very slim.

The other negative, which again usually stems from either uneducated or flat out unscrupulous advisors is how the guarantees work.  Insurance companies are pretty smart, so advisors/agents who promote them as 6% or 8% guaranteed returns are not revealing the facts.  You'll see this also in the video, as the maximum realistic upside is closer to 4% and you typically need to live 10 years or more past your life expectancy to even have a shot at those types of returns.

The ethical way to describe this (and others like it) annuity would be that it is a safe way to get low single digit returns over a time period of 12 years or more. Should income be a major priority it can guarantee income for life, but the effective rate of return on your money for that guarantee will be less than 0% unless you live close to your life expectancy, and could be as high as 3% to 5% if you live much longer than your life expectancy.

Any expectations higher than that are unfair for investors and very irresponsible of the agent/advisor if presented that way.

At the end of the day if agents and advisors are honest I think there would be a lot less bad press on annuities.  Given the compensation structure of many index annuities though I think this might be wishful thinking on my part (many indexed annuities pay 6% to 10% commissions and those commissions never have to be disclosed to the buyers).

My end analysis of this annuity is the following:

If you are looking for a very long term investment that is guaranteed to not lose money, get a return in the 2% to 4% range over 20 years or longer, and have some extra benefits for long term care expenses and potentially death benefit for your beneficiaries; the Aviva Balanced Allocation Annuity 12 could be a good fit.  If you will need access to your funds in the next 10 years outside of the income rider benefit then I would stay away.  If you're looking for safe growth of capital - know that the risk adjusted returns for this annuity (and most like it) is not actually that good.  Testing this annuity against just buying 13 week Treasury Bills (which are more liquid and safer) shows that the annuity would produce a lower return and do so with more inconsistency as well.

For a more in-depth look just watch this 40 minute video I recorded that breaks down the entire test and shows how I arrived at the numbers in the post above:

What's my motivation in doing this review?

I'm doing this review and others like it to help investors make more informed decisions.  Sadly I've seen clients of my own firm fall for sales pitches with very misleading promises for some annuities.  Once people see how these really work and see the amount of time it takes to fully understand the real pros and cons they almost always tell me the annuities sold to them are nothing like what should have been described.  For some people there is a portion of their money that still makes sense for annuities, but like all investments there are risks, costs, and important facts to consider before making long term commitments.

If you or someone you know is considering this or any annuity feel free to reach out to me for a personal review of the annuity so you can get all the facts before moving forward.  For those that are non-clients, I'm a Fee-Only advisor that doesn't accept commissions for any work I do.  So when I review annuities (or any product for that matter) rest assured I'm doing so in an objective, conflict-free manner.

Thanks for bearing with me on yet another annuity review.  If you have been pitched an annuity and would like to see it backtested and explained like I've done for the Aviva BAA12 and Security Benefit SIA just let me know.  I'll plan on doing about one review like this per month in effort to help people make better, more informed decisions so they can feel confident about their financial well being.


Jason Wenk

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