Jackson National Life’s Perspective II Variable Annuity with the LifeGuard Freedom Flex rider offers all the standard features one expects from a Guaranteed Lifetime Withdrawal Benefit, but in addition offers the flexibility to invest your deposit premiums across a range of asset classes without restrictions. You can have 100 percent of the policy premiums allocated to international equities, or small cap stocks, whatever you so desire. This grants policyholders a significant option that is valuable and quite rare.
Back in the good old days, VA policyholders could pick from a rich variety of risky funds, to basically select any asset allocation — a mix of stocks and bonds — and then decide whether they wanted to protect their lifetime income by purchasing a stand-alone rider, the GLWB. The rider was an afterthought. Of course, some clever policyholders and financial advisors — cognizant of this guarantee’s value — would tilt their asset allocation to a slightly more aggressive stance, because of this extra protection.
Today, the situation is quite different. Post the financial crises of 2007-2008, very few insurance companies allow unrestricted asset allocation flexibility when a GLWB is selected, and in most cases they now impose caps of 70 percent, 60 percent and perhaps even 50 percent maximal equity exposure if you want the GLWB. This is quite the constraint, and if this trend continues might eventually negate the entire raison d’être of the GLWB — which is insurance against market shocks.
And yet, one major life insurance company that still allows policyholders the ability to go “all in” — and doesn’t seem to have any plans to rein in the practice — is Jackson in its Perspective II Variable Annuity with a Freedom Flex rider.
The basic chassis of the product charges a 1.10 percent mortality and expense risk fee plus an administrative charge of 0.15 percent, both imposed on the account value. The combined M&E&A of 1.25 percent is roughly in line with Jackson’s direct competitors.
Consistent with the flexibility mantra, Jackson allows policyholders to select from a menu of 5-8 percent annual bonuses, with the larger numbers obviously costing more. The step-up frequency is also flexible and in the hands of the policyholder, but can be selected as quarterly or annual. Note that while some buyers might lament the inability to adjust monthly — and this certainly would be nice — my calculations indicate that marginal value of 12 versus four adjustments per year, when translated into expected lifetime income, might not be as high as previously thought.
Likewise, now would be a good time to remind readers of the by-now tedious proviso – think of this like the Surgeon General’s warning on cigarettes — that JNL’s 5-8 percent bonus is only used for calculating lifetime income and is not a walk-away, or maturity value. It is a basis for allowable withdrawals and shouldn’t be compared to (miserly) rates available from safe bonds or bank deposits.
Moving on to the income stage, Freedom Flex allows for an initial withdrawal of 4 percent starting as early as age 35 all the way to age 64. At age 65 this rate is upped to 5 percent, until age 74. Then it increases to 6 percent from age 75 to 80, and finally plateaus at 7 percent for people starting withdrawals at the age of 81 or beyond. The joint-life withdrawal factors, which cost an extra 15 to 40 basis points, will be applied based on the younger covered life.
To be perfectly blunt, although there is some extra flexibility, none of the product features I have mentioned up until now make Jackson’s offering stand-out from any of the other GLWB product available in the market place.
Rather, the main feature that caught my eye is the elimination of any asset allocation or risk restrictions in their sub-accounts. You can invest however you want. Indeed, Jackson offers 99 different investment funds, and they are all fair game. Just to make this crystal clear, the product provides the ability to allocate 100 percent of your VA sub-accounts to any of the 99 options available and shoot for the fences with your protected portfolio. Thus, if you so desire, you can allocate the entire premium to a Small Cap Index Fund, say, or the International Index Fund. No restrictions, no forced models and no forced re-allocations. This is rare and valuable.
In an extended version of this column at www.ifid.ca,, I strongly urge policyholders to take on the maximum risk allowable inside the policy and thus extract the maximum value from the guarantee.
For those policyholders — and the many compliance attorneys — who are concerned that 100 percent equity is unsuitable for 70-year-old Aunt Dorothy, I remind you that nobody ever told you to place 100 percent of investable assets inside a variable annuity. De-risk the unprotected portfolio, and take on as much risk allowable in the insured one.
If you have $500,000 in a VA and $500,000 in mutual funds and you want a 50/50 stock/bond allocation in totality, then allocate the VA entirely to stocks and the mutual funds entirely to bonds (tax considerations aside.)
A suitable asset allocation is a comprehensive metric of your personal balance sheet, and should not be monitored silo by silo. Professor Harry Markowitz — the founder of modern portfolio theory — never, ever said that you should diversify every single account or policy you own. There is nothing wrong with silo concentration if you are globally diversified.
In sum, I grade this product an 8/10 — as long as it stays flexible — and would be quite comfortable recommending this as part of an optimal retirement income product allocation.
It is no surprise then that Jackson National Life’s Perspective II contract — together with their LifeGuard Freedom Flex — is the top selling retail variable annuity amongst independent financial advisors, according to Morningstar.
Freedom is popular. The insurance actuaries might hate me for this, but I say shoot for the corners.