VA Income Options Going Next-Gen
Traditional annuitization from variable annuities used to be the only way for advisors to offer clients lifetime retirement income. This is changing as the industry starts to release next-generation options.
First, some background. Traditional VA annuitization has provided a less than ideal income solution. For instance, it seems to require clients to relinquish asset control to the insurance company at annuitization. Likewise, brokers who facilitate the annuitization effectively lose those assets under management. Additionally, in most cases, traditional VAs do not offer any mechanism to help the payouts keep pace with inflation, as the annuitization typically occurs on a fixed basis.
In response to these evident drawbacks, VA companies have developed the guaranteed minimum withdrawal benefit for their VAs. The GMWB provides an income stream that generally doesnt require clients to give up asset control.
Now, some insurers are expanding this approach. To help retirees plan for the retirement income they will need, the companies are offering lifetime withdrawals on the GMWB features in their VAs. This “lifetime GMWB” offers 3 key features:
1) Allows clients to maintain equity exposure and maximize potential for growth while providing a hedge against inflation;
2) Enables clients to retain control and access to the asset once income is being drawn;
3) Mitigates longevity risks by guaranteeing the lifetime income stream.
The lifetime GMWB does have some drawbacks relative to variable annuitization. For instance, the features typically dont reflect age in the income payment. Receiving a 5% lifetime income may look attractive to a 55-year-old, but a 60- or 70-year-old client may be leaving some income on the table if the client takes the GMWB (which is not age-related) rather than annuitizing (which does take client age into consideration).
The protection offered by the lifetime GMWB guarantees enables VA clientsfor the first timeto keep their money in the market by helping shield the assets from the negative effects of market downturns. This means the assets can have more power to outpace inflation. And, unlike previous forms of annuitization, these lifetime income streams dont require clients to give up control of the assets to an insurer.