“Many of the success stories we enjoyed in 2009 revolved around income guarantees, especially riders on variable annuities that allow clients to capture market gains while also providing a floor when equities turn south,” says Benjamin Hill. “Although VA investment subaccounts were negatively impacted by the markets this past year, clients’ incomes did not diminish–in some cases they even rose–because of the product guarantees.”
Hill, a financial planner and principal of Hill Financial Advisors, Westlake Village, Calif., says that VAs offering guaranteed minimum income and withdrawal benefits will maintain a prominent place in income planning strategies in 2010. Because individual retirement accounts suffered such severe losses during the economic downturn, clients increasingly are turning to vehicles that can withstand, and benefit from, market fluctuations.
The VA guarantees give clients the confidence to invest more aggressively than they would otherwise feel comfortable doing in a down economy, he adds.
How much longer VA manufacturers can make good on these guarantees remains, an open question, however. As insurers’ own investment portfolios also got wacked during the recession, they now have to shore up their capital reserves. To that end, sources says, some carriers are instituting less attractive guarantees, dropping them, or raising fees for the optional riders.
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Says Hill: “This past year, a number of insurers reduced their guarantees on products and increased expenses. It’s amazing how quickly they’ve changed prices and features to adjust to the current economic realities.”
John Henry McDonald, a chartered financial consultant and founder of Austin Asset Management Co, Austin, Tex., agrees, adding: “The poor investment performance of the life insurers will likely affect annuity payouts. The low portfolio returns have already resulted in higher premiums on term insurance.”
The financial troubles of carriers have not gone unnoticed by advisors. As financial institutions with once sterling reputations teetered on the brink of collapse, sources say, inquiries about the financial strength of life insurers have taken on added importance in client engagements.
The heighted caution is reflected in advisors’ product and plan recommendations. “Prudence now rules,” says Bruce Brittain, a principal at Brittain Financial Advisors, Highland, Utah. “Anything that might appear to be too aggressive I’ve removed from client conversations. In light of what’s happened to the economy, I’ve had to rethink everything I say and do in my practice.”
Products aside, what might put a damper on clients’ income plans would be more burdensome taxes, experts say. Advisors remain concerned, for example, about a possible reversion to the pre-2001 estate tax regime.
Under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, the estate tax exemption and top tax rate, respectively $3.5 million per individual and 45%, are due to sunset for one year in 2010. If Congress does nothing–the U.S. House of Representatives voted on December 3rd to make the 2009 tax provisions permanent, but the Senate has yet to take action–the estate tax will revert in 2011 to the pre-2001 regime, capping the individual exemption at $1 million and the top tax rate at 55%.
Should Congress act to return to the pre-2001 framework even sooner, experts say, clients who until now were safely within the exemption limits would suddenly find themselves with an estate tax problem. That, in turn, could adversely impact retirement assets needed to fund income plans.
“If we go back to a $1 million exemption, then people with a $3 million portfolio and $5 million in net worth will have a huge tax issue,” says McDonald. “Assets that otherwise would be devoted to retirement could be eaten up funding a life insurance policy to pay the tax. For individuals in their 60s or 70s, particularly those with health problems, the premiums could be substantial.”