Hartford VA Option Guarantees Principal With Upside Potential
Hartford Life, Simsbury, Conn., has debuted a feature for its variable annuities that the company says “guarantees principal with upside potential.”
That language sounds a lot like the definition of index annuities, which are fixed annuities that offer “downside protection with upside potential.”
However, this VA feature, called Principal First, is no index annuity. It is a VA option that, when purchased at the cost of 35 basis points a year, does the following:
It guarantees 100% of the principal investment in the VA, provided withdrawals do not exceed 7% of the guaranteed amount per year. (Note: Larger annual withdrawals void the guarantee.)
It automatically increases the guaranteed principal amount if the owner makes additional deposits.
It allows the owner to step up the principal protection amount every five years to the then current contract value (assuming the new contract value has risen above the original guaranteed amount).
The “guarantee of principal” part of the option refers to the money the owner has available for withdrawals, says Bruce Ferris, vice president of sales and marketing in Hartfords investment products division.
This does not guarantee an income stream, he stresses. It is a guarantee of principal–i.e., that the principal will be there for withdrawals, regardless of the VAs subaccount performance, if withdrawals do not exceed the maximum allowed (7% a year).
“For example, if the owner deposits $100,000 in a VA having this option elected, the owner can take out up to $7,000 a year (7% of the guaranteed amount of $100,000),” he says. The owner can make such withdrawals immediately, if desired, and can continue taking out this amount, no matter how the subaccounts perform, until the guarantee amount–called the “benefit amount”–is depleted.
In the example given, if the owner keeps taking out $7,000 a year, “it would take roughly 14.2 years to deplete the guaranteed amount,” Ferris says. If the owner withdraws a lesser amount each year and/or stops the withdrawals–both of which are allowed–it would take even longer to deplete the guaranteed amount, he says.
These withdrawals are guaranteed even in the worst-case scenario of subaccount values dropping to zero, says Ferris.