Variable Policy Guarantees Are Naturals
For Some Boomer Income Plans
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.
In this market, the advisor needs to bring the boomer to see the future as it is, she says. That includes helping the person see that, without a plan, “there is a good chance of outliving ones assets.”
After bringing that up, the advisor gradually can turn the discussion to exploring how paying a fee for a feature like the GMIB will provide the assurance of future income later on.
“This responds to the pain people feel from the losses they have suffered in the last few years,” she says. “Its a right-brain, left-brain kind of thing. The right brain says, I cant take it if my money goes down again. I need peace of mind. But the left brain says, equities are a great place to be, and I should be invested there for at least 10 years.”
The GMIB also speaks loud and clear to boomers who have been downsized into early retirement, says Carpenter.
The advisor can structure an income plan for them by rolling the persons qualified plan money into an IRA built with a variable annuity having a GMIB that allows dollar-for-dollar withdrawals with no waiting period, he says.
“Internal Revenue Code Section 72(t) allows penalty-free withdrawals if taken in substantially equal periodic payments for the 5 years or until age 59.5, whichever is longer,” Carpenter says. “That means such boomers can take the dollar-for-dollar GMIB withdrawals, without the 10% early withdrawal penalty, if they need to supplement income. Then, later on, they can annuitize the original premium or let it grow.”
This approach also has appeal for boomers who have been offered an attractive buy-out package, according to Carpenter. “It helps them make the decision about whether to take the offer or not.”
Advisors should consider the guaranteed minimum withdrawal benefit, or GMWB, too, says Cowan. This VA option guarantees the policy owner can take out a minimum withdrawal amount from the VA each year, regardless of subaccount performance, usually up to principal. The withdrawals can be used for income or to supplement income, he points out.
But, he adds, clients might want to arrange for retirement income in other ways, too. One of Cowans boomer clients just invested in real estate properties for that purpose, for instance. Others have bought both mutual funds and annuities and some bonds, too.
Therefore, he says, advisors should avoid recommending putting retirement funds into any one area. Also, they need to consider the various tax advantages of the choices.
“And, if the plan does include a VA with a GMIB or GMAB, be sure to select a quality insurance company with strong ratingsYou dont want to have the client annuitize with a company that might go out of business.”
When a VA is annuitized on a fixed basis, he explains, it becomes a general asset of the insurer and therefore subject to claims of creditors.
Guarantees in variable universal life policies can support income planning, too, says Gilbert Sullivan, product manager-variable life at AIG American General in Houston.
If the VUL is not a modified endowment contract, he explains, the owner can make tax-free loans to supplement other income. That is attractive to boomers, he says, because many boomers no longer count on Social Security as a key part of their retirement income. Also, some boomers have maxed out their 401(k)s and now supplement that with a nonqualified deferred compensation plan using VUL.
The no-lapse guarantees in some VULs help support these goals, Sullivan adds. One example is the Platinum Investor Flex Director VUL just released by his company. It has a built-in 20-year no-lapse guarantee plus an optional guaranteed death benefit to age 100.
The 20-year guarantee is especially valuable to younger boomers who have 15 or so years to go before retirement, Sullivan says. Its presence means owners can invest the VUL funds for growth without worrying about what happens to the death benefit if an early death occurs when the market is down. Then, if the growth investing produces substantial accumulation and the person is still alive at retirement time, the owner can draw on the VUL values to supplement other retirement income as needed, Sullivan explains.
Many advisors today are still talking with boomers about asset allocation and diversification, notes Minnesota Lifes Geurkink. But now is the time to “flash forward to the future.” The GMIB is not the only answer for income planning cases, but it should be considered as part of the answer, she says.
Reproduced from National Underwriter Life & Health/Financial Services Edition, March 19, 2004. Copyright 2004 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.