What’s the Deal with Dual Direction?

The Upside-Down Dynamics of a Downside-Up Design

The RILA product category has become a hotbed for innovation in recent years. As more carriers continue to enter the space, it is becoming increasingly necessary for new entrants to offer something unique in an attempt to gain market share from the small handful of companies that dominate the sales charts. While early offerings included relatively simple features like buffers, floors, and caps, more recent developments include barriers, tiered participation rates, step rates, contingent returns, milestone locks… the list goes on. Often, these types of non-standard options are intended to draw attention to the product without any realistic expectation that the option itself will attract meaningful allocation. But one such option that has managed to strike a chord is the so-called “Dual Direction.”

The Dual Direction concept was first introduced in the RILA space in 2020 by the company who pioneered the RILA product itself – Equitable Financial. Since then, multiple carriers have followed suit with either a copycat design or a similar concept with a unique spin. Sales data indicates some of these companies are seeing more than 20% of RILA premiums allocated to these types of strategies. That’s a jaw-dropping figure given the historical dominance of more traditional strategies and the large number of choices policyholders have in these products. Why has Dual Direction gained so much more traction than other crediting innovations? And, more importantly, is it really worth the hype?

How Does it Work?

Before we dive into how Dual Direction works, let’s start with a little RILA 101 for those who aren’t intimately familiar with the product. Registered Index-Linked Annuities (RILAs) are a type of deferred annuity that credit interest based on the performance of an index – much like a fixed indexed annuity (FIA). The key difference is that with RILAs, credited interest is allowed to be negative. The policyholder accepts some downside market risk in exchange for higher upside potential than an FIA. But unlike the full downside risk exposure of traditional variable annuities (VAs), RILAs include some amount of protection from losses, usually in the form of a “buffer.” If index performance is negative but within the buffer, the policyholder receives an interest credit of zero. If losses exceed the buffer, the policyholder absorbs the excess loss. On the upside, the most common crediting strategy is a cap, which we’ll assume needs no explanation. We’ll refer to this buffer/cap option as the “standard option” throughout this article. The diagram below illustrates the interest crediting for the standard option relative to the performance of the underlying index assuming a 10% buffer and a 16% cap.

Dual Direction builds on the standard option’s design by adding the potential for positive credits in negative index return scenarios. Instead of getting a zero credit if index returns are within the buffer, Dual Direction credits the absolute value of the index return. For example, a return of -5% leads to a credit of +5% and a return of -9% leads to a credit of +9%. The value of Dual Direction is that it creates positive returns in a larger number of index return scenarios than the standard option.

But those extra positive returns come at a cost. Like the standard option, there’s a cap on the upside potential, but the cap on Dual Direction is lower than on the standard option. Carriers offer Dual Direction options with both 1-year and 6-year terms and buffer levels in the 10-20% range. For purposes of the diagram below, we’ll focus on the 1-year, 10% buffer options offered on Equitable’s Structured Capital Strategies Plus product. At the time of this article, current caps are 13.5% for Dual Direction and 16% for the corresponding standard option.

Positive returns in either direction. The larger the loss, the larger the gain. Pretty cool story, right? But what makes us scratch our heads is what happens beyond the buffer. As negative index returns approach the 10% buffer, your credit gets larger. But as soon as the returns breach the buffer, you lose it all – and continue to lose more. If the index returns -9.9%, you get +9.9%, but if it returns -10.1%, you get -0.1%. So, once the index return starts going negative, you are effectively rooting for the largest possible negative without going past the buffer. What is this –  “The Price is Right”?

Volatile Values

The “cliff” pattern at the buffer level is created by including a digital option component in the hedge portfolio. A digital option, sometimes called a binary option, is an all-or-nothing-style option, where the buyer either receives a predetermined payoff in outcome A, or nothing in outcome B. In scenarios where the index is hovering on the edge of outcome A or outcome B as the option is nearing maturity, the market value of the digital option can become very volatile. As recent RILA regulations now call for carriers to reflect option values in the client’s account value, this can create a roller coaster ride for the client, the carrier, and the hedge counterparty. Take the scenario below for example – these are hypothetical interim value calculations for the 1-year Equitable options we’ve been describing under a given pattern of index returns during the final week of the term.

The index performance hovered around a 9-11% loss for the entire week. The standard option’s interim value smoothly approached its final payoff of -1%. Dual Direction ended at the exact same outcome, but only after spending the week in positive territory and even being up 6% just 2 days before the end of the term. That’s a heck of a swing for a product category that’s built on the concept of protecting from market downturns, and would’ve made for a stressful week for this policyholder.

A (Fictional) Tale of Jane and John

The year is 2003. Jane Doe and John Doe (no relation, believe it or not) are two neighbors in a quaint suburban neighborhood, each with their eyes on retirement. Prior to heading to watch the new box office hit, Finding Nemo, at the theater with her family, Jane spots John in his yard cleaning up after his fourth of July party from a few days ago and walks over to strike up a conversation. In this fictional universe, Jane and John share the same financial advisor. This advisor introduced each of them to the Dual Direction concept within a RILA and they’ve had a few conversations together on the idea (in this fictional universe, RILAs have also been a well-known investment commodity for years). They both like the concept – particularly that even if the market is down over the six years their money is invested, there’s a chance they’ll receive a positive interest credit.

After catching John’s attention and discussing what they each did for the fourth of July, Jane informed John that she decided to move ahead with her RILA purchase and submitted her application yesterday. He gleefully responded that he had a meeting earlier today and did the same. In the span of 24 hours, both Jane and John filled out their applications, sent in their checks, and began waiting for approval from Really Good RILAs Insurance Company. Jane’s application was approved, and her contract was issued on July 11, 2003. John’s was issued on the next business day, July 14, 2003. Both Jane and John put all their premium into the 6-year Dual Direction strategy with a 10% buffer.

Fast forward nearly 6 years. The S&P 500 is floundering (no Finding Nemo pun intended) after the severe drop due to the Great Financial Crisis and both Jane and John are sweating out the final days of their 6-year Dual Direction segment. The index is shaping up to finish right around -10% – the segment’s inflection point. As their Contract Anniversaries hit, Jane contract sees a -11.92% S&P 500 return lead to a 1.92% loss in her Contact Value. John’s contract, issued on the business day after Jane’s, sees a -9.76% return in the S&P 500 and therefore a 9.76% gain in his Contract Value. Two drastically different results, separated by a single business day. And while the story is fictional, the results are not – these are actual historical returns of the S&P 500, and would’ve been actual crediting results if Dual Direction had existed at the time.

Why does the story of Jane and John matter? In some ways, this sort of cliff due to the luck-of-the-issue-date is not new to the annuity world. Performance Triggers, which also rely on digital options to provide an all-or-nothing payoff to consumers, function similarly. But there’s a key difference: Performance Triggers are sold entirely on this all-or-nothing idea. If the underlying index is up, a consumer receives the declared rate. If the index is down, they receive nothing. The Dual Direction design rewards a client the more the index is down… until it’s down too far. Is this confusing, stress-inducing, game-show-esque option really worth it?

Is The Price Right?

The economic cost/value of Dual Direction can be quantified by looking at the hypothetical prices of the options carriers use to hedge it. Because of its complex zig-zag payoff pattern, Dual Direction requires a whopping six option legs to hedge – compared to three for a buffer/cap strategy, and two for a FIA-style floor/cap strategy. Specifically, the positive payoff between 0% and -10% – which we’ll henceforth call the “shark fin” – consists of the following three options that are not contained in the standard option:

• A long at-the-money (ATM) put option, which creates the upward-sloping payoff starting at 0% and moving to the left.
• A short out-of-the-money (OTM) digital put option, which creates the cliff in the payoff at -10%.
• Another short OTM put option, which offsets the long ATM put so that payoffs don’t continue to increase beyond -10%.

Note: The standard option also contains a short OTM put option, which creates the downward-sloping payoff beyond -10%, but Dual Direction actually contains two of them. To isolate the cost of the “shark fin,” we only included the one that is additional to the standard option.

Historical option pricing analysis indicates that the additional cost of hedging this shark fin benefit over a 6-year term, which is the duration to which most RILA business is allocated, is extremely small. Over the last ~15 years, the isolated cost of the shark fin at the 10% buffer level would’ve ranged from about 0.20% to 0.60% of the policyholder’s premium, with an average around 0.30%. For context, the total option cost for a typical 6-year RILA hedge is somewhere in the neighborhood of 20% of premium in the current environment. If you can get that extra crediting potential at a near-zero extra cost, why wouldn’t you?

Well, because if it has little to no cost, that means it has little to no expected value. And the true cost to the policyholder is not the insurer’s hedge cost, it’s the opportunity cost of the difference in caps. Looking at Equitable’s current rate sheet for SCS Plus, the cap on a 6-year 10% buffer Dual Direction segment is 125%, while the corresponding standard option offers a 500% cap. So perhaps the better question is: if the shark fin has little to no expected value, why would you accept a cap that is 375% lower? Granted, a cap becomes somewhat nonsensical beyond a certain point. A 500% cap on the standard option is probably no more valuable than a 250% or even 200% cap, which would make the comparison slightly less absurd, but the point remains – economically, there should be almost no difference in caps between the two options.

To be fair, the cost would be much more significant with either a larger buffer level or a shorter term. For a 6-year 20% buffer, the shark fin’s average historical cost over the same period was about 4.40%, which is a much more meaningful portion of the ~20% option budget that is typical for a 6-year option. For a 1-year 10% buffer, it was about 0.75%, also a decent-sized chunk of the roughly 5.00% carriers are spending on 1-year options. So does that mean these variations are worth it? Again, it all depends on the cap tradeoff. Take a look at current rates from a few Dual Direction carriers:

OK, enough talk of option costs and economic value. Whether the hedge cost is 5 bps or 500 bps, these options do indeed have the potential to credit more than the standard option in certain scenarios. But how often do those scenarios occur? We looked at all possible 6-year periods beginning with the inception of the S&P 500 through the end of 2024 (33,236 of them to be exact). For each 6-year period, we applied Equitable’s current rates for 6-year 10% buffer options. We pitted Dual Direction against the standard option and determined for each option: 1) the average historical index credit across all scenarios, 2) how often that option would’ve won, and 3) how much it wins by in those win scenarios. The results:

Our first observation is that the vast majority of the time, these two options would’ve had the exact same result – we’re dealing with a small set of “tail scenarios” where one or the other would outperform. That said, the standard option not only won in more scenarios than Dual Direction, but ran up the score with a significantly higher “win margin” in those scenarios. This makes sense considering the maximum by which Dual Direction can possibly outperform the standard option is 10%, whereas the maximum by which the standard option can outperform Dual Direction is 375%. We’ll let you decide which end of that trade you’d rather be on.

Now let’s look at how the stats shake out for a 20% buffer level, using the 6-year options on Prudential’s FlexGuard as an example. Using those options, the standard option wins much more frequently, albeit by a smaller margin than Equitable’s 10% buffer offering.

What about a 1-year term? The likelihood of a down-market over a single year is much greater than over an entire 6-year period, which is why the cost of the shark fin is so much higher. And based on current cap differentials, the winner isn’t quite as obvious at first glance. For example, with Pacific Life’s 1-year 10% buffer options, the caps for Dual Direction and the standard option are 11.75% and 15.00% respectively. The maximum win margin for Dual Direction is still 10%, but in this case the maximum win margin for the standard option is only 3.25%. This levels the playing field a bit:

The average margin of victory for the standard option is much slimmer than it was over a 6-year term, but the standard option still wins much more often than Dual Direction. All-in, the historical average 1-year credit for these Pac Life options would’ve been 5.3% for Dual Direction and 5.9% for the standard option. Closer, but history still favors the standard option.

What Else is Out There?

In addition to Equitable, carriers offering the original Dual Direction design include Prudential, Pacific Life, Corebridge, and RiverSource. But there are numerous other positive-credit-for-negative-return features in the marketplace. We examine each of these below, including a similar statistical comparison to the same carrier’s corresponding standard option.

Principal’s “Peak Buffer”

This strategy keeps the upward-sloping pattern as returns approach the -10% level, but beyond that, it replaces Dual Direction’s cliff with a gradual down-slope, creating the “peak” shape in the payoff diagram. This not only removes the all-or-nothing risk to the consumer, but allows Principal to avoid the use of digital options in their hedge strategy – an advantage in terms of risk and calculation complexity.

Because of the greater degree of downside protection beyond -10%, the cap on positive returns is lower than Dual Direction. Principal was advertising a 7.00% at the time of this article. The cliff-smoothing is an improvement in our opinion, but the see-saw pattern is still a bit confusing, and the limited upside may make this one a tough sell. That said, the stats are a bit surprising – this one is the standard option’s toughest contender yet:

Lincoln’s “Dual15 Plus”

A unique option from Lincoln is Dual15 Plus, which is offered only as a 6-year strategy. In scenarios where the return is positive over the 6-year term, it pays the greater of 15% or the index performance, subject to a cap. At the time of this article, the cap was 100%, meaning you can cash out as much as double your investment after 6 years. In negative return scenarios, it pays the index return plus 15%.

Think of it as getting a 15% “head start” on the index. If the index goes up, you stay at 15% until the index “catches up,” at which point you keep going up with the index until you hit the cap (not shown on the diagram). If the index goes down, it eats into your 15% head start, but doesn’t eat into your principal until the entire 15% is depleted.

Design-wise, we think this one is pretty slick. It combines the best aspects of a traditional buffer (no loss until a certain threshold), Dual Direction (positive credit for negative performance), and performance trigger (fixed credit for modest positive returns). But the scoreboard shows that on average, the standard option still comes out victorious. Dual15 Plus actually wins in a greater percentage of scenarios, but in the scenarios where the standard option wins, it wins big.

Also offered by:

• Symetra – “Buffer Plus.” Symetra’s product is offered with 10, 20, and 30% buffer levels on 6-year returns.

Equitable’s “Dual Step Up”

Equitable doubles down on the “dual” concept with another design called “Dual Step Up.” If the index return is anything better than the 10% buffer, you get a predetermined flat positive credit (9.50% at the time of this article). If the index return is less than the buffer, you absorb the difference. This design doesn’t eliminate the cliff that occurs at the buffer level, but it does eliminate the upward-sloping pattern leading up to the cliff as you move from right to left on the payoff diagram – and is more similar to the Performance Trigger payoffs that have become more standard in the FIA space.

Dual Step Up’s win margin is wider than the standard option’s, meaning when it wins, it tends to win bigger than the standard option. However, the standard option still wins in more scenarios and ultimately produces a higher average credit.

Also offered by:

• RiverSource – “Contingent Return”
• Symetra – “Dual Trigger”
• MassMutual Ascend – “Dual Performance Trigger”
• Brighthouse – “Step Rate Edge”

Lincoln’s “Dual Performance Trigger”

Based on the name, you might think this one works the same way as the Dual Step Up/Trigger options described above – but you would be wrong. Lincoln’s Dual Performance Trigger is actually more like a cap than a performance trigger. Lincoln’s marketing materials describe it as follows: “The dual performance trigger rate is credited to your account if the index change is up, flat, or down within the protection level at the end of a term. If the index change is down more than the protection level the dual performance trigger rate is used to offset loss, which may provide a positive return.” The way we’re interpreting it, they really just add the buffer (10%) and the “dual performance trigger rate” (7.25% at the time of this article) to the index returns in all scenarios, and then cap the result at the dual performance trigger rate. Despite the confusing naming convention, this one is ironically one of the cleaner, more straightforward strategies in this realm. The 7.25% rate (cap) is nothing to write home about, but if you’re looking for a way to get positive returns in some negative scenarios without the complex see-saw pattern, this one might be for you.

However, the stats pretty clearly favor Lincoln’s standard option in this case:

Also offered by:

• Jackson National – “Performance Boost.” Jackson’s strategy is very similar except that instead of adding both the buffer and the trigger/cap to the index performance, they just add the buffer (10%) and then offer a higher cap (currently 11.50%).

Caveats

We should make a couple concessions before we close. First, as always, past performance is not indicative of future results. When our great grandchildren update this article 100 years from now, the results could look completely different. And if you were to buy a RILA today, historical returns wouldn’t matter – you would experience a single scenario that isn’t part of the dataset used for this analysis, and it very well may be the scenario where Dual Direction knocks the socks off the standard option.

Second, this analysis was done using S&P 500 index values back to 1928. If we were to focus on a subset of the data, for example the last 25, 50, or 75 years, the statistics would change (though as it turns out, not by much, and not in Dual Direction’s favor).

Third, we have exclusively been examining these options with the S&P 500 as the underlying index. Some of these carriers offer similar options on different indices, such as the Russell 2000, Nasdaq 100, MSCI EAFE, or one recently launched by RiverSource that’s based on the lesser of S&P 500 or Russell 2000 performance. These options may illustrate better or worse than what we’ve covered in this article.

Fourth, the rate environment is constantly changing. This analysis all depends on where carriers set their caps, and this article is just a snapshot at a point in time. For example, if Equitable were to increase their 1-year 10% buffer Dual Direction cap from 13.5% to 14.5% while keeping the corresponding standard option at 16%, the historical stats could favor Dual Direction.

Conclusion

Dual Direction has a great sales pitch. It sounds like you get the best of both worlds, until you pull back the curtain a bit. The risk introduced by the cliff in the payoff structure, the lack of economic value provided by the “shark fin,” the asymmetry of the potential returns, and the pricing differentials maintained by carriers are all cause for concern. Some of the other variations improve upon these issues, but historically, the numbers almost always point to the standard option being a better value. As carriers undoubtedly continue to innovate in this area, we’ll continue asking the question: are the innovations actually adding value, or all they all just hype?

-Drew Schmalz