This Might Be A Good Time o Bring Back Real Estate VAs
The past two years have seen a great instability in the investment marketplace. This is perhaps the first such instability that many professionals in the variable annuity industry have ever seen.
As you know, VA sales are down and, although fixed annuity sales have been increasing, they have by no means picked up the volume done in the VA business before the current market downturn.
Therefore, many insurers and distributors are looking for new products to enable them to offer competitive retirement vehicles to customers.
Perhaps the answer is already there in the industrys existing VA lineup.
Perhaps instead of looking for new types of products, the industry needs to adapt VA investments already available to provide customers with the change in investment orientation they need.
We are thinking, in particular, of the so-called “real estate VA.”
In the early 1980s, the first real estate VA came to market. It offered investment in a portfolio of mortgages and “brick and mortar” real estate. As such, it afforded an alternative to the usual mix of stocks, bonds and insurer guarantees used by other VAs at the time.
That product was well received by distributors and consumers alike, and it provided respectable yields to contract owners.
However, all that came to an end with the advent of the 1986 Tax Act. Among other things, this Act terminated the favorable tax treatment those conventional real estate investments had enjoyed and caused a disaster in real estate values. As a result, the real estate VA faded into oblivion.
But, in todays market, we have to ask: Is this the time to consider reincarnating the real estate VA?
The structure of the VA business and the VA products we offer has changed a great deal since the 1980s, of course. But we believe that a real estate VA can be folded relatively seamlessly into the portfolio of investment options available in todays VA products.
This would have important advantages for buyers. For one thing, it would afford purchasers an alternative investment in this time of instability in other markets.
Moreover, the VA contract owner need not be “locked in” to a real estate portfolio when market conditions change. Such a product can permit changes to other types of investments in much the same manner as is possible with most VAs. Thus, contract owners can have a new investment alternative in addition to those already available under their conventional products.
We know of at least one insurer that has a real estate variable annuity product under development.
The introduction of such products would only serve to enhance the already attractive features in the modern VA. (See chart.)
The regulatory structure of VAs requires some creative work in order to design a real estate product that is practical to be sold and serviced in todays market. Yet, the structure that was developed and implemented for the first real estate VA in the 1980s still works, and it enables insurers to offer and administer the product in much the same manner as they use with conventional VAs.
The critical element in designing and successfully offering a real estate product today is similar to that of the first such product. This element is quality management of the investments underlying the product.
Management of a real estate portfolio involves much more than does management of conventional mutual fund investments. Not only does the manager have to pick assets to purchase, hold or sell, but, if brick and mortar investments are used, the manager must see to the element of managing the properties themselves.
Obviously, this is not the place for managers without substantial experience in the business.
Other forms of unconventional investments might also be used with VA products, permitting other alternatives in this time of unstable markets.
Our point is, the VA industry has always been creative and we are sure this will continue with the development of new, creative investments to keep variable annuities competitive.
Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are principals in the Westport, Conn. and Ft. Lauderdale, Fla. law firm of Blazzard, Grodd & Hasenauer, P.C.You can e-mail them at Norse.Blazzard@BGHPC.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, February 4, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.