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December 16, 2009 at 07:00 PM
We’ve heard all the stories. Variable annuities cost too much. They’re not tax efficient. They’re too complicated. And while many advisors love them, some won’t go near them.
But looking back at the last decade, VAs were one of the best investment products to help clients get through this economy. Advisors who thought the extra basis points spent on bonuses and guarantees were worthwhile have been vindicated.
The VA’s floor kept investors’ retirement savings above water. And many clients who opted for voluntary living benefits got a guaranteed percent–as much as 5% or 6%–on top of that. Add the step-up feature that locks in account gains, and VA policyholders have an easier road to rebuilding their retirement income than many others.
VAs are shedding their stigma and are gaining popularity among more advisors and clients. Sales figures are showing this shift. VA assets for the third quarter posted their first year-to-year increase after five quarters of decline; and VA sales were $31 billion, according to the Insured Retirement Institute, Washington, D.C. Third-quarter 2009 VA net assets rose to $1.3 trillion.
The VA arms race is over and carriers have revised their products to reflect new economic and market conditions.
Worth the cost
So are VAs still worth their cost, even if investors can’t get the same bonuses and deals that were available just months ago? Yes, because no other product provides the same protection against inflation, longevity and market risks as does a VA.
Living benefits offer investors predictability and security that is reassuring in the current environment. Guarantees, which were often criticized as expensive and unnecessary, have protected annuity investors from the market downturn. Step-ups (which help lock in account gains) and bonuses are now largely age-tiered and still range from 5% to 6%. Also, in comparing VAs with living benefits to mutual funds and separately managed accounts (SMAs), the actual fee difference is only about 2%.
Advisors often overlook the tax-deferred status of VAs when determining if they are right for their clients. VA tax-deferral provides greater investment growth potential. With a non-qualified VA, investors are taxed only on earnings and only when they withdraw money–all at their ordinary income tax rate.
Unlike mutual funds or SMAs, VA tax liability is not passed on to the contract owner annually. With mutual funds, investors may be taxed annually on their investment, as either long- or short-term capital gains, and they may even be taxed in a down market. Even if a client’s mutual funds are taxed at the long-term capital gains rate, the taxes on an annuity withdrawal at the ordinary income rate can be comparable, and may even be lower, depending on their retirement income level.
