These days, more and more clients are concerned about having guarantees in place so they don't have to worry about outliving their assets. Wouldn't it be nice if everyone could benefit, with at least part of their assets, from a product that pays a guaranteed income for life, regardless of interest rate or market changes?
Financial professionals know that this type of product is certainly available — either with an immediate annuity (known as a single premium immediate annuity or SPIA
) or on a deferred basis utilizing a variable annuity (VA) or fixed annuity (FA) in combination with an optional guaranteed lifetime withdrawal benefit (GLWB) rider.1
While the market for SPIAs has remained relatively flat, there has been an explosion of deferred benefit annuities with GLWB
riders. Dozens of insurance companies offer products with different surrender charge periods and bonus structures, along with "rollup" and "payout" rates that can easily confuse even the most seasoned financial professional.
If a client buys an annuity with the added cost of a GLWB rider, it seems that everything else about expected contract performance is a non-issue, as the focus needs to be on the guaranteed income that will be provided to the client beginning at a particular age. After all, the cost of a GLWB rider isn't cheap, costing more than 1 percent annually in some contracts.
So, which contract type, either variable or fixed, will provide the most guaranteed income?
Consider a recent article in Investment News magazine titled, "Variable Annuities Selling At Fever Pitch," where the opening paragraph reads, "Investors, attracted by the allure of guarantees, gobbled up variable annuities during the second quarter, placing some insurers on pace to beat estimates and bringing broker-dealers closer to pre-crisis VA sales levels."2
And, according to LIMRA, 63 percent of variable annuity buyers in the first quarter of 2011 elected the GLWB.3
As you can see, GLWB riders on VAs are a big business.
Does this mean that variable annuities
provide the highest guaranteed income for clients or has the marketing of VAs with GLWB riders just been better than the fixed contracts? I believe it's a little of both -- and for many clients, they might be better off having purchased a fixed annuity with GLWB riders if their goal was to maximize guaranteed income.
Because every client's financial needs are different, it's hard to generalize favoring one contract over another. However, a financial professional should make sure that they have compared the guaranteed payouts for each product type depending on the client's current age and when they expect to begin drawing income.
Let's look at a hypothetical example of an individual, age 55, with a single annuity deposit of $100,000. If this individual is seeking to defer income for 10 years, the guaranteed lifetime annual payout from one of the most competitive VAs is $10,500. One of the most competitive fixed annuity (adhering to 10/10 compliance4
) would guarantee $11,550 annually. Ten percent more guaranteed income
is not insignificant by any means.
Testing different scenarios indicates that if income is to begin within five years of purchase, the VA may provide better guaranteed income. Later deferrals seem to favor fixed annuities, but again, much rests on the purchase age and the age at which distributions will begin.
As we continue to grapple with a sluggish economy, where fear is winning over greed in the marketplace, it's comforting to know that our industry can provide a contract that guarantees lifetime income
for our clients, subject to the claims-paying ability of the insurance company. By providing an objective analysis of the various product types, we are adhering to the service excellence our clients expect from financial professionals.
Your clients should consider the investment objectives, risks, charges and expenses of the variable annuity and its underlying investment options carefully before investing. The prospectuses for the variable annuity and underlying investment options contain this and other information. Clients may obtain free prospectuses by calling you or the issuing company and should read the prospectuses carefully before investing.
Annuities are long-term investments designed for retirement planning. They are a contract between the client and an insurance company, under which the insurer agrees to make periodic payments to the client.
There is a surrender charge imposed generally during the first 5 to 7 years that you own the contract. Withdrawals prior to age 59 1/2 may result in a 10 percent IRS tax penalty, in addition to any ordinary income tax.
Additionally, variable annuities offer the opportunity to allocate premiums among fixed and variable investment options that have the potential to grow income tax-deferred, until an income stream begins. These payments, called annuity income, will begin either immediately or at a future date and a part of which may be the return of your premium or principal. This income is guaranteed by the issuing insurance company for a specified period of time or for the life of the annuitant. Optional benefits and riders are available for an additional cost. Investment sub-account value will fluctuate with changes in market conditions.
All guarantees are based on the financial strength and claims paying ability of the issuing insurance company, who is solely responsible for all obligations under its policies.
Michael S. Pinkans, CFA, is Senior Vice President, Marketing for Zenith Marketing Group with headquarters in Freehold, N.J., and a registered representative and investment advisor representative for ING Financial Partners, Inc, member SIPC. Zenith Marketing Group is not a subsidiary of nor controlled by ING Financial Partners.
1 The guarantees provided are based on the claims-paying ability of the issuing insurance company.
2 Darla Mercado, "Variable Annuities Selling At Fever Pitch", August 7, 2011, InvestmentNews.
3 Dan Beatrice, "Variable Annuity Guaranteed Living Benefit Election Tracking Survey (2011, 1st quarter)", May 2011, LIMRA.
4 The 10/10 Rule is legislation that limits annuity surrender charges to a maximum 10 years, and a 10 percent surrender penalty.
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