Throughout the past several years, I've tackled some of the "million-dollar questions" our industry has, including:
- Whole life insurance vs. equity indexed life insurance (EIUL)
- Using CV life insurance for college planning
- Growing money with tax-deferred 401(k) plans vs. EIUL
- Roth IRA conversions
In past articles, I've given you specific, verifiable math so you may determine for yourself if my conclusions are accurate. With clients clamoring for a guaranteed income for life that they cannot outlive, I figured it was time to compare the two available options: variable annuities (VAs) and fixed indexed annuities (FIAs). Both products have a guaranteed lifetime income benefit (GIB) we can compare.
I simply took a 50-year-old example client who will pay a $100,000 single premium into a VA and FIA, both of which have a GIB for life. Then I illustrated where the client has the option of starting a GIB for life at ages 60-69. I had the VA illustrated at 8 percent gross and the FIA illustrated at 6 percent gross for the assumed growth rates in the actual account value. I want to see which one guarantees the most income for life and what the walk-away account values look like.
VA and FIAs are tough products to compare
These are tough products to compare because variable annuities carry significant fees (which can be dialed up or down). Additionally, VAs and fixed indexed annuities have different guaranteed rates of returns, different rollup timeframes, different payments percentages, etc.
For this comparison, I called a trusted advisor and had him find for me the "best" VA with a GIB (the one illustrated has a 7 percent "guaranteed rate of return" for "accumulation" purposes). I had him run the illustration with the lowest possible fees so I could give the benefit of the doubt to the VA.
For the FIA, I used what I think is the best one in the market (one that guarantees a 7 percent rate of return for accumulation purposes with a 20-year rollup and the fairest GIB in the payout phase).
Comparison 1 -- Income benefits
|VA Income||FIA Income||VA Income||FIA Income|
|Year||Age||8% Gross||6% Gross||0% Gross||0% Gross|
What you'll notice is that the FIA with a 7 percent guaranteed return has a higher GIB than the VA with the same 7 percent guaranteed return. Also, the FIA does better still when the VA and FIA return 0 percent. In order to get the VA anywhere close to the FIA's GIB, the return would have to be in excess of 10 percent gross (and with most VAs, in excess of 12 percent gross).
|VA Acct.||FIA Acct.||VA Acct.||FIA Acct.|
|Year||Age||Value 8%||Value 6% Gross||Value 0% Gross||0% Gross|
You'll notice that the accumulation (walk-away) totals are higher for the FIA when the 8 percent VA and 6 percent FIA rates of return are used, and much higher when a 0 percent rate of return is used. It should be noted that the VA will pass a $100,000 death benefit to the heirs whenever the client dies.
Which product do you think clients would prefer?
My opinion is that a client would much rather use a product that will never go backward due to market rates of return, locks in the gains annually, and when using conservative numbers, outperforms a VA that carries more risk and less guaranteed income.
Is the above comparison perfect? Probably not, but it's not bad; and it tells me what I want to know; which is which one guarantees the most income and which one has the highest walk-away value (given reasonable assumptions).
What if you don't like or agree with my numbers?
One of the neat things about doing a newsletter that goes out to nearly 100,000 advisors is that I get a lot of feedback. If you don't like my numbers and you think you can find better VA returns, please feel free to do so and forward it to me along with the illustration.
If you have other suggestions to make my comparison better, feel free to make them. I anticipate that I'll get quite a few on this newsletter; and I anticipate running another comparison newsletter after all the feedback comes in.
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