Using the range of VA riders to address different comfort levels

By David Longfritz

Increasingly, advisors are evolving their relationships with clients beyond the standard goal setting and performance reviews to a more intimate understanding of client hopes and fears.

These advisors are taking the extra time to probe clients on their comfort level with the capital markets. They also are having honest discussions on the cost and value of variable annuities and their optional guarantees, such as living benefit riders, on their retirement investments.

Some successful advisors are taking this understanding one step further. What they are doing is segmenting the different living benefit riders along a continuum of fear and hope. The end result is the client winds up getting the appropriate product. This only can enhance the advisor/client relationship.

Specifically, the “Fear and Hope Index” helps advisors recommend one of the three major living benefit riders that may better suit client needs (see chart). The following reviews why each living benefit rider appears where it is on the continuum.

Guaranteed Minimum Income Benefits. GMIBs are purchased by clients who have considerably more fear than hope. Why? Because GMIBs were designed to provide a consistent level of future retirement income in a catastrophically long market downturn.

Most GMIBs provide an annuitization value based on the greater of a 5% or 6% annual increase to the income base or an annual step-up of the contract value after a waiting period of (usually) 10 years. A dollar-for-dollar withdrawal provision allows clients to take their 5% or 6% annual increase for payments each year and then annuitize their original investment after the 10-year waiting period.

In a 20-year down market scenario, the client always will receive a check.

But the tradeoff is that there is less room for hope with GMIBs. Once a client annuitizes, the income is fixed. If the market subsequently rebounds, the annuitant does not participate. Equally important to many clients is that nothing is left for beneficiaries should the client pass after annuitizing the contract.

Guaranteed Minimum Accumulation Benefits. GMABs are purchased by clients who still have a larger amount of fear than hope. GMABs essentially assure clients that after a waiting period (usually 10 years), they will get their original investment back without having to annuitize the contract. So, if there is a 10-year market downturn, they are covered.

The drawback is that they cannot take current income from this product during the waiting period without a pro-rata reduction in the guarantee. This is the least sold living benefit of the three.

Guaranteed Minimum Withdrawal Benefits. GMWBs are for clients who have an equal balance of fear and hope. GMWBs allow the contract holder to take a set percentage of the original investment (usually 5%) as income per year, regardless of investment performance. So, in a 20-year down market, clients still get all of their principal back. And in up markets, clients may step-up their guaranteed amount to the highest contract value and increase their income amount (usually every three to five years).

This balance of fear and hope comes without the tradeoffs of having to annuitize as with the GMIB, or having to abstain from taking withdrawals, like the GMAB.

It is important to note that all these optional benefits are available for additional annual fees above the contract and insurance-related costs associated with VAs.

What is the rider more clients want to use? GMWBs, according to many advisors.

The GMWB feature breaks the pattern of VA product development–i.e., the industry’s history of introducing riders that clients hope not to use. (The death benefit, of course, was the original example of this–no one wants to die.)

The GMIB followed in that historical pattern (no one is hoping for a catastrophic 20-year down market). GMABs were next in line–after 10 years, the client has received no income and the original investment is worth the same amount as when the client first started.

The first exception to this product development pattern was the GMWB. As a result, this rider increasing has client appeal because of its ability to help balance fear and hope. Used correctly, it provides a dependable income stream (fear) that can increase with favorable investment performance (hope).

Each client’s situation is different. Ultimately, advisors need to decide which living benefit best serves client needs, and they only can do that by understanding individual’s level of fear and hope.

David Longfritz is senior vice president and chief marketing officer at John Hancock Annuities, Boston. His e-mail address is dlongfritz@jhancock.com.

Some advisors are segmenting the different VA living benefit riders along a continuum of fear and hope