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.