It is arguable that the most popular features to be added to variable annuities in recent years are guaranteed minimum withdrawal benefits. Many mainstream VA insurers have added these features to their products, which have proven to be extremely popular with producers and consumers alike.
In recent months, we have not been to a dinner party or cocktail reception where someone hasn’t asked our opinions on these features. It is indeed amazing how deeply the awareness of these features has penetrated the general investing public.
The prevailing attitude is that the GMWB permits a VA contract owner to “have his cake and eat it too.” One friend, a well-to-do physician, stated that he had bought a VA with a GMWB with over a million dollar premium. His only worry? That it was too good to be true.
Where else can this physician invest with the upside of participation in the stock market while at the same time being protected against the vagaries of down markets? The answer at the present time is nowhere. Yet this is not likely to be so in the not-too-distant future.
Most likely, virtually every major investment firm is busily working on providing a GMWB to customers who buy mutual funds, managed separate accounts and even hedge funds–all without requiring the client to become involved with a VA. We are not aware of any such guarantees having come to market as of yet. But we are busy developing the concept, and we are sure others in our line of business are doing likewise.
If the GMWB comes to market with non-VA investments, it will not be the first time that concepts developed for VAs have been adapted to the broader spectrum investment marketplace.
The rear-end sales load for mutual funds is such an example. The concept (legally characterized as the “contingent deferred sales charge”) was developed for VAs and came to market in 1979. Shortly thereafter, the CDSC was adapted to mutual funds and trillions of dollars of CDSC mutual funds have been sold since that time, as well as the majority of VAs with CDSCs.
Adapting a GMWB to non-VA investments presents a number of legal and actuarial challenges, not to mention the investment complications involved in guaranteeing a minimum payout that may run for decades in the future. It requires close cooperation among all of the technical disciplines involved in the guarantee.
Even such basic issues as determining the legal status of the guarantee when it’s not attached to an insurance product is a challenge. Furthermore, the determination of which regulators must be involved is often mind-boggling.