Variable annuities have undergone and are still undergoing constant improvement, experts say, and a more advisors than before are willing to consider them for clients.
Research recently asked John McCarthy and Kevin Loffredi of Advanced Sales Corporation (www.advsales.com), publishers of the Annuity Intelligence Report, for their thoughts on the VA marketplace.
What are some recent trends?
Loffredi: The most dramatic is having the lifetime withdrawal benefits, and in particular, having the benefit based on two lives -- a spousal lifetime guaranteed withdrawal benefit. We have also seen age-banding of these benefits where the withdrawal percentage is not fixed when you buy the contract. The rate usually depends on the age at which the first withdrawal occurs, so the older you are when you take that first withdrawal, the higher the payout percentage.
It just seems like every week, the carriers are trying to one-up each other in terms of how the withdrawal percentage is calculated, or how the benefit base, which is ultimately what the withdrawal percentage is calculated against, increases.
Additionally, companies are adding provisions to the withdrawal benefits that double the withdrawal benefit if the annuitant goes into a nursing home. Companies like Lincoln and Prudential and Protective have benefits that if you are confined to a nursing home, instead of receiving five percent while you are in the nursing home, they will pay you ten percent. Prudential takes it one step further and says that if you cannot perform two out of seven activities of daily living (ADLs), they will double the percentage, subject to an exclusionary period.
What about the risk that issuing insurers could have trouble paying for these benefits?
McCarthy: Professor Moshe Milevsky of York University has said that he thinks some of these benefits may be underpriced. We've gone from a position where traditional variable annuities sometimes get a bad rap for setting fees that are too high to a point where some of these living benefits may be underpriced if they become hot sellers.
I believe the actuaries have their arms around that, but only time will tell, really.
How should advisors consider VAs in planning clients' retirement incomes?
McCarthy: I think they would be crazy not to look at them, because life spans are getting longer, the baby boomers are approaching retirement, they are going to live quite a long time, and there are a whole lot of them. A variable annuity is a way to get your own personal pension plan.
Can you share advice with regard to titling VAs?
Loffredi: Many people think that annuities are set up like a certificate of deposit (CDs) at a bank, where if either one of the CD's joint owners dies, it will pay out to the surviving owner.
Well, on a variable annuity, it's not automatically joint tenants with rights of survivorship -- there's no rule that says that's how it has to work.
Fortunately, many do work that way; so when one of the spouses dies, the other spouse steps into the shoes of that contract and continues it or may elect to receive the death benefit. But other contracts will pay out to the primary beneficiary. If that's a child, a trust, or a charity, you may disinherit the surviving spouse.