Indexed Annuities Meet GLWBs. The Perfect Product?

While finding the most suitable products to meet a client’s retirement income goals is fundamental to developing an appropriate retirement planning strategy, discovering the most desirable mixture of product features can prove equally critical. In this vein, advisors should take note that indexed annuity sales have gained steam in recent months—and new studies suggest that while the base product itself may be attractive to many, in the vast majority of cases it is the optional features that are actually propelling sales. Understanding how the guarantee features that can accompany indexed annuities have made these products competitive against more traditional bank-sponsored products has, therefore, become crucial to determining how these options can help an indexed annuity rise to the occasion.

Developing the Right Product Mix

Recent LIMRA studies show that, when the feature is available in the connection with indexed annuity products, 68% of purchasers chose to add guaranteed lifetime withdrawal benefits (GLWBs) to the base annuity product.

This figure highlights the importance of guaranteed retirement income to clients—but also may be a reflection of the recent volatility in the market for guarantee features that accompany variable annuity products. While many variable annuity carriers have modified or bought back the guarantee riders associated with these products, the demand for indexed annuity products that offer GLWBs has surged.

In general, GLWBs guarantee that the client will be able to withdraw a certain percentage of the value of the client’s benefit base, which has been growing by a guaranteed amount over the course of the annuity’s deferral period (the guarantee is commonly somewhere between 4% and 8%), for the client’s lifetime. The indexed annuity itself provides a guaranteed growth rate, but also ties the level of growth to the performance of one or more stock index. While this allows the client to participate in market gains, insurance carriers cap the return a client can receive in order to offer guaranteed benefits regardless of any market downturns.

When a GLWB is combined with an indexed annuity product, the client may be able to maximize the level of income he or she can draw from the product package—with a lower premium payment rate than what might be required when a GLWB is paired with a variable annuity in today’s market.

Pitching to the Right Client Group

For clients nearing retirement age, GLWBs can combine with indexed annuities to provide a stable stream of retirement income while still providing growth opportunities that exceed those currently available in traditional bank-sponsored investment products, such as a certificate of deposit. While both types of product are popular with clients approaching retirement because they offer concrete downside protection, indexed annuities with GLWBs will also offer the potential for participation in market growth and, generally, a higher rate of return as a result.

However, for younger clients with longer investment timelines, the cap that indexed annuities place on a client’s ability to participate in market growth may make the product less appropriate when compared with a variable annuity that offers an attractive roll-up, or growth, rate and a guaranteed income feature.

Conclusion

Finding the right product mix for a client always requires an individualized analysis of the specific client’s financial position and goals. As the numbers suggest, pairing an indexed annuity with a GLWB in today’s market can provide the combination that clients nearing retirement age have been looking for.

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Originally published on National Underwriter Advanced Markets. National Underwriter Advanced Markets is the premier resource for financial planners, wealth managers, and advanced markets professionals who provide clients with expert financial and retirement planning advice.

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