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.

For example, insurer wholesalers are still the best resource and generally have product strategies for many economic scenarios. Certain broker-dealers with internal sales desks or websites can also provide relevant product information. However, shrinking wholesaling and B-D staff may limit availability of such support.

Fortunately, several high quality third party resources are available as well. A few firms offer competitive intelligence services or databases that allow comparison of prices and features across products and companies.

Finally, advisors must filter the information and provide clear, actionable guidance. Here are some suggestions:

–Reinforce the value of the guarantees bought by showing clients the guaranteed amounts on their contract statements.

–Use client-approved materials from the carriers to explain features and calm client concerns and suggest that the best advice may be just to “sit tight” for now.

–If clients were sold what was positioned as an “asset allocation program wrapped around a tax-deferred vehicle,” reposition it as a financial instrument with benefits that function more like life insurance or a fixed-income investment. If the VA’s death benefit value is worth much more than the account value, have the client consider keeping the annuity so the death benefit can be passed on to heirs.

–Look at the available investment choices and help clients determine if it is time to reallocate, bearing in mind that many contracts with living benefits may have asset allocation restrictions.

–Explore the living benefit options and help clients consider whether it might be time to exercise any of these benefits.

–Understand and discuss when a VA is “in the money” and when is the most opportune time to exercise complex options.

The role of trusted advisor requires much more than product expertise. In today’s environment, it is imperative to help clients understand the value of what they own, which may be much different–and greater–than what they think it is.

Al Dal Porto is senior manager-insurance and actuarial advisory services practice at Ernst & Young’s Financial Services Office, and is based in Chicago. Gerry Murtagh is product manager-retirement income knowledge bank in the insurance and actuarial advisory services practice of Ernst & Young’s Financial Services Office and is based in New York. Their respective e-mail addresses are: al.dalporto@ey.com and gerry.murtagh@ey.com