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Portfolio > Economy & Markets > Fixed Income

Help Clients Use Every Tool In The Variable Toolbox

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Many people enjoy rolling up their sleeves and tackling jobs. But if doing it yourself isn’t a viable choice, is there a professional handyman to call for help?

That’s a question for consumers who increasingly are being asked to ensure their own secure financial future themselves, even as defined contribution retirement plans continue their steady march toward dominance in the U.S. employer-sponsored retirement arena. Financial advisors must step into the role of financial handymen and women, providing tools and expertise to help clients meet the challenge.

As with any project, successful completion of a financial plan relies on having the right tools. Variable products can be the right tools for a wide range of advisors and clients. In fact, combinations of variable products may be ideal to meet the varied needs of customers.

Like starting a project with a blueprint, a financial plan needs to start with a thorough assessment of client needs and wants. For retirement income, it likely starts with an assessment of the client’s fixed expenses–bare necessities that must be paid month after month.

To maximize the stream of income (meaning highest monthly payment for the lowest cost), few tools can beat a lifetime variable immediate annuity. A VIA provides a starting income based on the premium amount and a chosen assumed investment rate. Upon choosing an AIR (say 5%) and the VIA’s investment options, the customer begins receiving income, perhaps with monthly payments remaining level for the rest of the initial contract year.

At the end of year one, the monthly payment is adjusted depending on how the underlying VIA investments tracked the 5% AIR. If the investment choices returned more than the 5% AIR, the contractual payments increase for the next year. If they returned less than 5%, the payments decrease. This up and down movement has pros and cons. On the pro side, the policyholder has an opportunity for payment growth that can outpace inflation. On the con side, uncertainty about the monthly payment size from year to year can present a hardship to retirees trying to meet cash flow needs.

A guaranteed payout annuity floor (GPAF) could keep the payment from dropping below a guaranteed level, but these are not yet a widely embraced feature in the VIA environment. However, as demand for income solutions increases with the aging of baby boomers, companies that can develop a strong GPAF paired with an appropriate asset allocation requirement will almost certainly find themselves in the financial advisor’s toolbox.

The next tool can be used to cover discretionary expenses and provide liquidity for unexpected expenses. Several aspects of variable annuities make them suitable for this and a valuable companion to the VIA.

One of these is the broad variety of available VAs. If a client wants additional income while maintaining liquidity, a VA with a guaranteed minimum withdrawal benefit might be the perfect tool. If the client wants a floor of protection, either for future cash value or future income, a VA with a guaranteed minimum accumulation benefit could be the device. To guarantee future income while maintaining short-term liquidity, a guaranteed minimum income benefit would be hard to beat.

Additional VA features that may prove useful are the various portfolio optimization or lifestyle fund choices that facilitate instant diversification across several asset classes. Large opportunities exist to develop asset allocations that are intended to offset certain financial risks. Imagine the potential for an allocation designed to outpace inflation over the long run paired with a VIA or a GMWB. Or, how about one tuned to keep up with medical costs?

Lastly, if wealth transfer is a client priority, life insurance is likely the most tax efficient vehicle, and variable universal life may be the best choice. This especially could be true with the emergence of living benefits (GMWBs and GMABs) for VULs. The VUL product could be strengthened further if the trend toward creation of universal life/long term care combination products takes hold in the VUL market.

If a VUL could provide a fantastic way to transfer wealth upon death, guarantee a floor of income or cash value if needed, and provide significant LTC benefits should that contingency arise, the VUL could become the proverbial Swiss Army knife of the toolbox.

It seems the insurance industry spends too much time trying to decide which product is “best.” Like politicians in a primary, this infighting can damage the industry as a whole. The real winners will be companies and financial advisors that realize all these tools have their place and that develop educational/sales tools that present the total plan to the client.

Robert P. Stone, FSA, MAAA, is a consulting actuary at Milliman.


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