Advisors Pan Living Benefits And Payout Mutual Funds

“All things being equal, lower costs win,” said Jeff Daniher, co-owner and lead financial advisor with Ritter Daniher Financial Advisory, LLC, a fee-only firm based in Cincinnati. “Why pay for something that you don’t need, and equally important why pay for something that you don’t knew that you are paying for or may not even want. So we look for transparency in pricing. I don’t have any concern over however someone gets paid as long as the client understands where the money is going.”

However, he cited products such as single premium immediate annuities as reason to be optimistic. But he also noted that under the current interest rate environment, “the hard part is annuitizing at 3%. At 8%, we’d be all over it [recommending it to clients.]“

He added that longevity insurance can be a tough sell to clients, and consequently, clients have to understand that insurance is a cost but that there is a benefit. If the client is focused on the maximum amount of money to leave to heirs, he continued, then that choice could have its own set of consequences–the risk of not having enough money on which to live.

Norse Blazzard, of the law firm of Blazzard and Hasenauer, Pompano Beach, Fla., and a NAVA founder, said that different living benefit guarantees have different benefits and when properly used or when used in tandem with several living benefits, they can offer the consumer income protection.

For example, he said that guaranteed minimum income benefits are appropriate for those who can wait 7-10 years before starting to annuitize.

Annuities are designed to achieve 4 goals, he said: longevity protection, inflation, deflation and liquidity.

Blazzard said that 3% is the total cost usually associated with a variable annuity and that is on the high side of the spectrum. On average, living benefits cost approximately 30 basis points or .003%, he added.

But, he continued, it can be money well spent given that there is a .005% chance that your house will burn down and a 65% chance that a person will outlive income. It is considered wise to insure one’s home so why wouldn’t it be as wise to insure against outliving income, he noted.

Kathy Cody, senior vice president–alternate retirement solutions with Phoenix Companies, Hartford, Conn., said that the cost of a living benefit guarantee in a variable annuity reflects current market conditions.

These costs are tied to the cost of hedging the equity risks in these products which depend on the volatility of the equities market and current interest rates, according to Cody. For instance, she explained, if there is high volatility, it would cost more to buy a 10-year put which allows the put holder to sell a particular equity.

The cost associated with VAs, and associated living benefits have to factor in hedging costs, insurance company expenses and a margin for the company, she noted.

The cost of Phoenix living benefit guarantees have ranged from 85 basis points to 125 basis points, or .0085%-1.25% depending on market volatility and interest rates, she said.

Insurers can try to keep costs lower by being very focused about the guarantee being offered or trying to find more reasonable ways to hedge, she said.