After 10 years of advocating variable annuities, many financial advisors are now seeing the insurers with which they do business raise prices, experience ratings downgrades, reduce wholesaling forces, decrease benefits and features, and, in some cases, eliminate optional benefits.
Rumors are circulating that product lines will be significantly altered by year-end.
Clients’ existing VAs have taken a hit, giving client confidence a severe shake.
What is an advisor to do?
First and foremost, understand the annuities owned by clients. It is time to look at existing contracts and ask the following questions about the value of each benefit, as well as the relative advantage of an existing contract over a new product:
?How valuable is the death benefit? Clients may have an optional death benefit that provides a fixed rate of return or step-ups over time. Such death benefit values may now be much higher than the policy account value, and the guaranteed amount would be lost or forfeited if the client surrendered or exchanged the contract.
?Does the living benefit rider provide a guaranteed stream of income for life? The fact that annuities provide income for the life of the client gives them an advantage over many other fixed-income investments. Some benefits also contain step-ups and persistency bonuses that have become quite valuable relative to the level of the equity market these days.
?Should the client add funds to the existing contract or purchase a new one? If a client’s contract has been in force for several years, it may have more valuable features than the new ones being designed today since many companies are in the process of increasing fees and decreasing features. This may be an ideal opportunity for clients to add money to existing policies and thereby capitalize on the benefits of these richer contracts.
Once these questions have been answered, gather information on the exact features and triggers within the contracts.
This information can range from the impact of withdrawals on guarantees (e.g., does the contract have a guaranteed minimum income benefit with a dollar-for-dollar withdrawal feature?) to the assessment of the contract maintenance fee (some contracts will assess a fee once the account value drops below a certain level, say, $50,000).
Many clients may see their first-ever maintenance fee assessed simply because the account value has dropped below the threshold. Prepare them for the possibility of triggers and for what will happen to the value of their contract if they exercise benefits or make withdrawals.
Resourceful financial advisors can find the information to help clients make important decisions of this kind.