American Legacy Design 1 review

It depends on what you want it to do. As a tax-deferred investment account with optional guarantees, it is a reasonable, fairly priced variable annuity. It is a good fit for someone who wants market exposure and tax deferral and is willing to accept investment risk. It is a poor fit for someone who thinks they are buying a safe, principal-protected annuity, because a variable annuity is the one annuity type that can lose value when the markets fall.

The main reason to buy American Legacy Design 1 is tax-deferred growth across a real investment menu without the annual tax drag of a taxable brokerage account. The secondary reason is optionality. The same contract can be configured for pure accumulation, or upgraded with the ProtectedPay income rider for future lifetime withdrawals, an enhanced death benefit for legacy planning, or the long-term-care rider for care costs. That lets a buyer commit to the wrapper now and decide later how to use it.

I think this annuity is best for a long-term investor, often in the 50s to early 60s, who has maxed out other tax-advantaged accounts, has a multi-year time horizon, and is comfortable with their balance moving up and down with the markets. It works in both qualified and non-qualified money, though the tax deferral matters most outside a retirement account. It is less appealing for someone near or in retirement who needs principal protection, for anyone who may need the money inside the 7-year surrender window, or for a buyer who mainly wants guaranteed income, since that has to be added through a rider rather than coming built in.

Strip away the brochure language and you are buying a tax-deferred investment account wrapped in an insurance contract. Your premium goes into subaccounts, which are pooled investment portfolios that work much like mutual funds, and the contract value tracks their performance directly. There is no cap, no participation rate, and no floor on the core contract, so you get the full upside and the full downside of whatever you allocate to. The insurance part of the deal is the death benefit and the menu of optional riders, plus the tax deferral on gains until you withdraw.

The core of this contract is subaccount investing. American Legacy Design 1 offers 36 subaccounts ranging from equity funds to bond funds, managed by Capital Research and Lincoln Investment Advisors. You allocate premium across those subaccounts, and you can move between them, with transfers limited to 12 per year and market-timing transfers not allowed. A dollar-cost-averaging option is available for systematic rebalancing. Because the value rides directly on the funds, two things drive your return: which subaccounts you pick and what those underlying funds charge, with net expense ratios running 0.72% to 1.15% on top of the contract-level fees. There is no minimum guaranteed surrender value tied to a fixed rate the way a fixed or indexed annuity has, so the MGSV is listed as N/A.

The most meaningful secondary feature is the optional rider menu, because it is what separates this from a plain investment account. The Lincoln ProtectedPay Select Core/Plus income rider is an add-on, not a built-in benefit, and the spec lists a maximum annual charge of about 1.50% and a 6.00% annual benefit-base roll-up for up to 10 years. That roll-up grows a separate income base used to calculate future lifetime withdrawals, not your actual cash value. The contract also offers a guaranteed minimum and an enhanced death benefit, and a long-term-care rider with a roughly 0.04% to 0.14% annual charge. These give the product real planning flexibility, but every guarantee you want is a separate cost layered on the base contract, and the exact rider terms in the spec are medium-confidence, so confirm them on the current rider disclosure before relying on them.

This is a 7-year commitment, and the surrender charge starts at 6% and steps down to 6%, 5%, 5%, 4%, 3%, 2%, then zero after year seven. Each contract year you can withdraw the greater of 10% of total purchase payments or contract value without a surrender charge, which gives you some access for income or emergencies without unwinding the contract. There is no market value adjustment, so unlike many fixed and indexed annuities your surrender penalty does not swing with interest rates, which is a genuine plus. Withdrawals before age 59 and a half can still trigger a 10% IRS penalty on gains, and any withdrawal reduces both your account value and the basis for optional rider benefits. Even with the 10% free amount, this is long-term money, not a short-term parking spot.

The base contract cost is about 1.10% a year, broken down as a 1.00% mortality and expense (M&E) charge plus a 0.10% administration fee. There is also a $35 annual contract fee, which is waived once contract value tops $100,000. That 1.10% base is on the lower side for a variable annuity, which is the main reason this product rates as well as it does. The catch is that the base cost is only the first layer. On top of it you pay the underlying subaccount net expense ratios of 0.72% to 1.15%, and then any optional rider charges, up to roughly 1.50% for the ProtectedPay income rider and 0.04% to 0.14% for the long-term-care rider. A buyer who elects the income rider and picks a higher-cost subaccount could realistically be paying well over 2.5% all in. The trade is straightforward: you are paying for tax deferral, a death benefit, and the option to layer on guarantees. Whether that is worth it depends on how long you defer and how many riders you actually use, since unused optional features still cost nothing only if you never elect them.

Legal Entity: The Lincoln National Life Insurance Company

Parent: Lincoln Financial Group

A.M. Best Rating: A