A new report offers advisors the opportunity to compare the features and funds of variable annuity (VA) living benefits. Strategic Insight, a research firm for the mutual fund and wealth management industry, announced the release of “Variable Annuity Living Benefits and Eligible Funds” on Friday.
The report, says the company, offers “comprehensive coverage of 23 living benefits from 17 insurance companies, . . . detailed and concise summaries on each feature’s unique characteristics.” This coverage, it says, allows the reader to:
- Monitor competing living benefit options
- Identify investment limitations associated with key living benefits
- Identify equity exposure on the investment options associated with living benefits
- Compare living benefits and investment options across VA providers
- Compare fund performance and fund composition of the eligible investment options.
Carina Diamond, managing director and securities principal partner at SS&G Wealth Management in Akron, Ohio, said in a phone interview that such a guide is “a fantastic idea, because the complexity has just exploded. Variable annuities were complicated before, and now there are so many sources and companies that change them frequently; it makes it difficult.”
Diamond, who was on a panel at the Retirement Income Symposium on Nov. 8, said that such a guide should focus on suitability: “Why would this rider be suitable for a client, and why not?” Annuities offer both living benefits and death benefits, she explained, and there’s “a lot of variability” in the living benefits.
“When you become a student of VAs,” she continued, “you learn that there’s a big difference in the two main phases of owning [one]. The first is accumulation, and the second is withdrawal—or decumulation, if there is such a word. There’s a big difference in how the riders work. Depending on what you’re looking for, you may want a more aggressive product up front, or [one that’s] more aggressive on withdrawal.” It depends, she said, on how fast the income base is growing, and on the investment criteria.
“Something that’s attractive for growth,” she warned, “can be trouble when withdrawing.” Others, she added, have generous opportunities, “but not guarantees,” for growth in income once the client begins to withdraw funds. If the client is in her sixties when she begins withdrawal, she “could live for 40 years. If there’s no opportunity for a raise, it’s not a good thing. Even Social Security gives raises.”
Diamond also warned advisors to be very careful of the other withdrawal features, since these vary greatly. Some VAs, she said, have a “free withdrawal” provision of 10% or so per year; others have systematic withdrawal capabilities. These vary greatly on the impact they have on the income base. Some are pro rata, and others are not; “this gets back to suitability for the client.”
While she acknowledged that it can be very difficult to anticipate what a client may need, she said advisors must attempt to do that. “Annuities are a fantastic tool, but they’re a tool, not a solution to everything,” she cautioned. “Don’t tie up everything in an annuity, because if the client needs money it could jeopardize the contract. Have other places for clients to take lump sums in case they need it. They always say they won’t, but they do.”
She told the story of a client that had called her around the holidays, “needing” to purchase a sports car for his wife for Christmas. “That’s the word he kept using, ‘need,’ ” she stressed. No matter what she said to dissuade him, in the end he withdrew the money and jeopardized the contract when he took out more than it allowed. “I think he was a bad boy,” she confided. “Unexpected things can happen.” Advisors, she said, need to be prepared.
A further piece of advice Diamond gave was this: “If you fall in love with an annuity company and their guarantees, talk to their competitors and ask them to poke holes in it.” At any given time, she added, she works with three companies and challenges them to prove which is best. It pays off; she explained that good wholesalers will tell her if they’re not the best choice for an older client or for another set of circumstances, and sometimes several wholesalers will come in together when she has to decide where to place a large amount of money for a client and they have what amounts to a brainstorming session. “That’s very helpful to me,” she said.