Variable annuities are poised to capture a significant amount of the exploding IRA rollover market, thanks to the numerous advantages they afford over other IRA products.

According to a recent report by the Financial Research Corporation (FRC), IRA assets are projected to grow to $4.8 trillion by 2010 from $2.2 trillion currently. And annual IRA rollovers could grow close to a half a trillion dollars by the end of the decade. Factors that are driving the IRA rollover market include the aging of the baby boom generation, demand for personalized investment and estate planning advice, and the need for protection against market downturns.

The most successful IRA advisors will be those that offer clients advice and structured products that complement clients income, tax, retirement and estate planning needs. To this end, variable annuities are key.

Some benefits of a variable annuity within an IRA include comprehensive investment choices and guaranteed death and lifetime benefits. Also noteworthy are guaranteed withdrawal benefits that provide protection against downside risk and sophisticated distribution techniques, and estate planning strategies that maximize the amount that is transferred to the clients beneficiaries.

These unique features appeal to a growing segment of IRA investors. For one, the variable annuity offers an easy way to invest with different asset management firms and diversify among a wide range of portfolios without the need to set up separate IRAs. But the main appeal is the insurance companys guarantees, which let investors confidently invest in equities because they provide an important safety net in volatile markets.

Death Benefits: A common guarantee provides a death benefit to the IRA beneficiaries in an amount at least equal to the amount originally contributed to the IRA, even if the market value of the IRA was considerably less at the time of the IRA owners death. An optional step-up feature generally locks in potential market gains on each contract anniversary and passes the highest of these gains to beneficiaries prior to annuitization. These guaranteed minimum death benefits (GMDBs) particularly are attractive to IRA investors who intend to leave substantial assets to their heirs.

Living Benefits: There are also living benefits, known as guaranteed minimum income benefits (GMIBs), which provide guaranteed income for life and protection against downside market performance. However, GMIBs require the IRA owner to annuitize the IRA contract. Considering that few annuity owners elect to annuitize their contracts, GMIBs may lose their allure. As a result, some insurance companies offer guaranteed minimum withdrawal benefits (GMWBs), which do not require the contract to be annuitized.

A typical GMWB guarantees at least 100% of the IRA contribution in the form of regular withdrawals paid over a specified period of years, regardless of market performance. Some contracts offer a bonus up to an additional 25% if no withdrawals are taken during the first 5 years. This is an attractive feature for IRAs because most IRA owners will not want to take immediate withdrawals.

One more benefit offered under the basic GMWB, the optional step-up feature, allows the guarantee to be reset at the new higher account value should the IRA perform well. This helps the IRA owner participate more in the growth of the markets without incurring the risk of a loss during a later market downturn.

These features are leading wealthier baby boomers to purchase variable annuities within their IRAs. Powerboomers, defined by FRC as people between the ages of 50 and 60 with at least $100,000 of investable assets, rated protection against downside risk as their most important consideration when selecting an IRA, according to the FRC report.

Wealth Transfer Strategies: Annuities used to fund IRAs also can offer wealth transfer strategies that maximize the amount transferred to IRA beneficiaries. Generally, distributions to IRA beneficiaries are made in a lump sum payment. However, depending on the beneficiarys income tax bracket, much of it could be lost to immediate income taxes.

A “stretch” strategy leverages certain Internal Revenue Code provisions whereby the beneficiary can take a distribution in installments, paid over his or her life expectancy; the undistributed amount continues to grow in a tax-deferred manner.

Couple the “stretch” strategy with guaranteed death benefits offered by annuities and the beneficiary could receive significantly more. Furthermore, some annuity providers allow the IRA owner to require that his or her beneficiaries receive their inherited IRAs as systematic withdrawals paid over their lifetimes. This technique is popular with investors who are afraid their beneficiaries will squander their inheritance.

The features, strategies and guarantees offered by many IRA annuities will become more attractive as baby boomers begin to retire in the next few years. Most Americans insure their house, life and cars. Doesnt it make sense to protect one of their most valuable assetstheir retirement accounts?

Brandon W. Buckingham, JD, LL.M., is the Director of Qualified Plans in the Special Markets Department at Manulife Wood Logan, Stamford, Conn. He can be reached via e-mail at bbuckingham@manulifeusa.com.


Reproduced from National Underwriter Edition, May 14, 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.