Annuities - Stackable vs Non-Stackable and Simple vs Compounded

Annuity living benefits can have a lot of jargon and complex parameters. For living benefits that have guaranteed growth of the benefit base, you'll often find two important sets of terms:

1. Stackable vs non-stackable
2. Simple vs compound

These terms control how exactly that guaranteed growth works over the years, and how it works together with the actual growth of the annuity balance.

If you have set the annuity to have a living benefit (rather than a 'Custom Plan'), you'll see the following in the 'Annuity Settings' window. (This is a fixed index annuity. You'd see slightly different options for a variable annuity.)

When the 'Benefit Increase During Deferral' is set to 'Rollup', you'll specify the rollup rate (7% in this example). This means that, during the deferral phase/before income begins (usually with some limit in time, which can also be entered in this section), the benefit base is guaranteed to increase each year by 7%. The question is then, well, how exactly does that 7% apply? Here we have our two sets of options.

Simple vs Compounded

Above you see the settings as Simple and Non Stackable. Simple interest means interest that is always based on the same base number. So, if you purchase an annuity with $100,000 and this is your initial benefit base, simple 7% interest would add $7,000 to the benefit base every year. Compound interest, on the other hand, would look to the current benefit base as increased by previous guaranteed increases.

If you choose 'Simple' interest, you'll need to specify the value upon which the simple interest is based. This will default to the current annuity balance. However, if this is an existing in-force annuity, you may have to enter a different value, likely the original total annuity premium.

Stackable vs Non-Stackable

Most living benefit annuities also have a way for annuity performance (investment returns, credited interest) to increase the benefit base. These increases are typically referred to as 'step-ups'. For annuities that have both roll-ups and step-ups, the question is, how do roll-ups interest with step-ups? When roll-ups are 'stackable', they are based on the highest step-up amount of the benefit base. When they are not stackable, performance-based step-ups do not affect the roll-up amount. The example below illustrates the differences.

Here we see the benefit bases of annuities A and B grow at $7,000 simple interest in the first two years. Annuity C's benefit base grows compounded, as we see in its $114,490 benefit base in year 2. Then all three annuities see a step-up to a benefit base of $125,000 in year 3 because the annuity balance is higher than the guaranteed amount that any of them would have seen otherwise ($121,000 for A and B, $122,504.30 for C).

In year 4, both B and C grow at 7% of $125,000. So, they both add $8,750 to the benefit base. In year 5, B again adds $8,750 because this is simple interest (but stackable, meaning now that simple interest is based on $125,000). On the other hand, C grows the previous benefit base by 7% because this is compound interest.

Year 4 for Annuity A can be a bit confusing. Why does the benefit base go to $128,000? Simple and non-stackable guaranteed benefit base growth is best seen as a competition between balance step-up and simple interest, as below.

In year 3, the simple interest growth would have taken the benefit base to $121,000. The stepped-up value of $125,00 is higher. So, that year, the benefit base is $125,000. However, in the next year the annuity balance is $126,000. The simple interest base is higher, so now the benefit base is $128,000.