Transamerica Principium II

Finally, when it comes to the allowable investments in the subaccounts, TPII offers an array of Vanguard-based exchange-traded funds. I’m a fan of Vanguard (full disclosure here: I own a number of their ETFs), so I am partial to a variable annuity which allows the index-hugging EMH-believing masses the ability to participate in the GLWB world. Transamerica offers a variety of model portfolios mixing numerous Vanguard ETFs. In fact, there is an option to allocate 100 percent of the premium to stocks, but this choice allows the company to utilize something called the “Open Allocation Method” (yes, more jargon), in which your money may be re-allocated into investment funds of its choice (not yours) to help Transamerica protect itself. Think of it as the company dynamically hedging, but with your money. Giving over this type of control leaves me queasy, but you can always retain control by selecting from the designated allocations. Of course, you never really have full control of anything in the VA world, since any company can yank funds, change sub-accounts and alter investment choices at whim.

In fact, the algorithm by which Transamerica re-allocates money from the open 100 percent equity allocation to the ProFunds UltraBear sub-account (yes, you read that correctly) is worthy of its own Ph.D. thesis — well beyond the scope of this article.

This all leads us to the topic of fees. As I mentioned earlier, TPII allows for a variety of death benefit options and charges accordingly. The same philosophy applies to their pricing for the guaranteed living benefits, which is one of the features I most admire in the TPII and the reason it scores highly in my book.

How so? For many years I have been puzzled by the lack of correlation between rider fees and the risk being assumed by the insurance company. Let’s explore this. If the money inside your variable annuity is allocated to 100 percent cash (which you should never do, by the way), the company faces absolutely no stock market risk. On the other hand, if the funds are 100 percent allocated to an emerging market fund, the company has assumed quite some risk indeed. After all, if Indonesia or Malaysia defaults or absconds with your money, the company (not you!) is on the hook. Why, then, do insurance companies charge the same rider fee, without regard to what kinds of assets are in the subaccounts?

Here is where TPII distinguishes itself. The fees they charge vary with the risk they are assuming. If the policyholder selects the Transamerica Index 75 VP, which is an approximately 75 percent equity and 25 percent bond portfolio, the company charges 1.25 percent of the guaranteed base in annual rider fees. If the policyholder selects 50 percent equity and 50 percent bonds, the fee is only 0.90 percent, and at 35 percent equity and 65 percent bonds the fee drops to 0.40 percent.

Let’s add-up the fees then. Assume you want a 35 percent equity and 65 percent bond ETF-based portfolio. You pay 85 basis points for the ME&A charge (no GMDB), another 79 basis points in fund operating expenses (service class), and then 40 basis points in rider fees (as a percent of the base, computed annually). Although it’s not quite accurate to add these numbers together, this totals 204 basis points for a product that offers tax-sheltered growth, some exposure to the equity markets and an option on guaranteed income for life.

And, while normally I would never endorse a 35 percent equity allocation inside a GLWB — after all, why pay for insurance on something that doesn’t need protection? — when all you are paying is 40 basis points, you can’t really complain. Alas, if you want 100 percent equity, add another 70 basis points. That would be my preferred allocation.

Finally, there are a few other nice features about the TPII. In particular, there is an income enhancement benefit that allows policyholders to double their rider withdrawal percentage to help with long-term-care expenses. Transamerica also allows policyholders to drop the rider and stop paying on the fifth anniversary of the policy. These are all extra choices, which you pay for when checking-out of the variable annuity buffet.

In sum, all things considered I would score the Principium II an 8/10. Indeed, I think the Principium II deserves its name, as it conforms to some of the “first principles” which I’ve outlined previously in these pages. In fact, I’m thinking of perhaps buying a small one for myself as yet another pet, assuming they don’t shut it down before I get the chance.