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March 18, 2004 at 07:00 PM
Variable Policy Guarantees Are Naturals
For Some Boomer Income Plans
BY
Do the newer guarantee features in variable annuity and variable universal life insurance products have a place in income planning for baby boomers?
They do, and in multiple scenarios, say experts contacted by National Underwriter.
The features arent appropriate for everyone, notes Howard Cowan, president and founder, Cowan Financial, New York. However, they are suited to clients who want the best of both worldsthe ability to invest aggressively as well as the safety of guarantees.
The guaranteed minimum income benefit, or GMIB, now found in many modern variable annuities, provides a case in point, says Joseph A. Carpenter, a retirement planning counselor at Carpenter Financial Services in Johnstown, Pa.
“With todays choppy stock and bond markets, boomers who are taking early retirement with the expectation of taking out 6% a year from their invested assets could end up depleting their resources before death,” he cautions.
But, if they invest in a VA with a GMIB, they know that when they annuitize, they are guaranteed a minimum lifetime income from the VA, he says. This minimum is assured, no matter how low the VA account value is at time of annuitization, he continues.
(Note: In most GMIBs, the VAs “benefit base” accumulates at a set rate each year, sometimes subject to a cap. The most common rate today is 5%, says Carpenter.)
“This feature creates an income stream the boomer cant outlive,” he says, adding “thats a powerful story to tell boomers who have suffered huge losses in the market during the last 3 years.”
The features do have a cost, and that can seem steep to some people, he allows. But, he asks, “Its steep compared to what? Having no money to live on?”
Too often, he adds, when the market crashes, people move their 401(k) or IRA money into cash. Then, they risk losing out on market gains that may follow.
By contrast, people who have a VA with a GMIB “can stay invested in the marketbecause they know they will still have a guaranteed lifetime income in retirement, even if the worst should happen with their investments.”
Before the last stock market downturn, boomers were widely viewed as feeling they were in control, points out Kerry Geurkink, marketing director at Minnesota Life Distributors, a business unit at Minnesota Life, St. Paul. The firm recently debuted its first GMIBthe “guaranteed income provider benefit”for its MultiOption Advisor VAs, to give clients more predictability in income.
“A few years ago, many boomers thought they had plenty of time to rebound, if the market were to drop,” Geurkink says. “It was like they were on autopilot, thinking they have Social Security and their savings, so everything will be OK.
“But now, many boomers are pretty angry,” she says. “The market showed them that mutual funds do go down and that stock-picking alone cannot compensate for longevity risk.”
As a result, boomers are realizing that “the do-it-yourself approach to retirement income planning doesnt work,” Geurkink says. “You need advice from a professional advisor.” And, she says, they need product features, like the GMIB, that can help them achieve their goals.
