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Variable Annuities: Its Time To Go Back to Basics In A Benefits-Driven World

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Variable Annuities: Its Time To Go Back to Basics In A Benefits-Driven World


Investors continue to choose variable annuities as they plan for their golden years. This isnt surprising, given the 76 million baby boomers preparing to retire. Many will look to financial advisors for guidance as they try to determine how to fund the 30 or more years they may spend in retirement. It is important, therefore, that producers renew their focus on the fundamental benefits of VAs in order to better prepare their clients for the future.

Education is Key

To effectively tap the $40 trillion of assets that these individuals will control during their retirement years, we need to take another look at the way variable annuities are sold. These products have become incredibly complex. As a result, we must shift the focus of our sales efforts back to the basicseducating clients about the product, features and benefits so they, in turn, are equipped to make sound investment decisions.

The first order of priority is to develop a thorough understanding of the investor and his or her needs. Does a VA make sense given the investment horizon, risk profile and potential liquidity needs? Once it has been determined that a VA is a suitable investment, the process of client education can begin.

Outpacing Inflation is a Priority

Its important not to lose sight of the primary reason most people invest for retirement, regardless of the product in which they invest. They need to grow their nest egg above and beyond the rate of inflation. VAs can help them achieve this objective by controlling taxes until the accumulated values are accessed, providing a wide range of money managers and offering a broad choice of portfolio asset classes and simplified asset allocation tools. Of course, surrenders of taxable amounts may be subject to ordinary income tax and, if prior to age 59, may result in an additional federal income tax penalty.

Appropriate asset allocation, although it does not guarantee a profit, is key to the success of any financial plan, and it is important that clients understand its benefit to long-term investors. Asset allocation models are provided for all levels of risk tolerance through most of todays state-of-the-art variable annuities. Top manufacturers provide sophisticated tools for managing investment options.

Whether the choice of underlying portfolios is institutionalized through a third party or hand- picked by the financial advisor, asset allocation in a well-diversified portfolio potentially can deliver results. If clients have the right asset allocation, the long-term results of the market potentially can do the rest. And, if the client is concerned about the short-term effect of market volatility, the advisor should then determine if it is appropriate to add an optional living benefit to the contract.

Optional Living Benefits Offer Additional Protection

The market downturn fueled the demand for optional living benefits, and the industry responded with a whole new breed of optionssuch as guaranteed minimum income benefits (GMIB), guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum accumulation benefits (GMAB).

GMIBs promise a minimum return after a specified waiting period and annuitization is required to obtain the benefit. Therefore, this benefit is most appropriate for clients who seek a future guaranteed stream of income.

Some clients seek the peace of mind of knowing that their current income needs will be met for a specified minimum time period without annuitization. GMWBs can meet these needs by enabling investors to make systematic withdrawals from a protected value.

GMABs typically guarantee a specified account value after a waiting period has elapsed. It may be appropriate for the client who seeks the upside potential of the market and principal protection. Many issuers of GMABs require annuitization, but others offer the benefit without this requirement.

Know Your Client, Understand the Benefit

Optional living benefits offer investors an extra level of protection, but they are complex. Advisors must conduct due diligence to develop a complete understanding of the benefit and determine if it meets the clients needs. Every company offers a different twistso it is important to not only be aware of the costs when comparing benefits but also of any restrictions that may apply.

With additional costs of up to .75% (most in the .35% range), the decision to add these features to a contract can be costly and should not be taken lightly.

Advisors should ensure that the investor fully understands the benefit, the annuitization requirements and mandatory waiting period before the benefits can be activated. Some waiting periods are as short as 5 years, but others can be as long as 10 or more, so clients must know what to expect.

The education process takes time, but the potential return to both the client and advisor is great. Dont let the complexity conceal the real value that variable annuities can provide. Start with the basics and the sales will follow.

is senior vice president and national sales manager of Prudential Annuities. Rick can be reached via e-mail at [email protected].

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.


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