Podcast Center
Video Center
Webcasts
Resource Center
Events
February 28, 2011 at 07:00 PM
In anticipation of the baby boomers’ exodus from the work force, financial services companies have inundated the market with guaranteed lifetime with-drawal benefits–income riders available on variable annuities–and fixed indexed annuities. The proliferation of these products and associated GLWBs has left the typical advisor’s head spinning as he attempts to stay on top of product innovation and change, as well as the hundreds of potential solutions for his clients.
VAs with GLWBs
In recent times, advisors have been very inclined to turn to VAs with GLWBs. According to a recent LIMRA survey, nearly 90 percent of all VA sales, a $150 billion a year market, include a living benefit feature. The popularity of VAs with a GLWB as the go-to guaranteed retirement income solution is directly linked to their perceived ability to deliver protection against the risks of longevity, sequence of returns and inflation.
VAs with GLWBs offer guaranteed income for life that provides security against the risk of running out of money if you live too long (longevity risk), or retire at the wrong time in a market cycle (sequence-of-returns risk). However, VAs do not provide a guarantee against running out of purchasing power (inflation risk).
Instead, investors are relegated to self-insure against inflation risk by leveraging the ability to allocate to the equity markets in their efforts to grow the underlying account value and, in turn, their income. While this may sound like a viable strategy in theory the cost of the underlying subaccounts, mortality and expense charges and rider fees make it unlikely to succeed in practice after withdrawals have begun.
Finally, VAs with GLWBs do not provide a guarantee against running out of assets during the distribution phase due to the sequence-of-returns risk. It is only the withdrawal stream that is insured. Thus, a VA with a GLWB provides lifetime income with access to underlying assets while they last but with limited ability to keep up with inflation.
FIAs with GLWBs
Like their VA counterparts, FIAs with GLWBs are also popular among independent agents. The FIA is a fixed annuity that differs from a VA by providing a guaranteed minimum rate of return on all or a portion of the principal, but like a VA, it offers potential upside. This is accomplished via the mechanism for crediting interest to the account values.
The index-crediting mechanism provides an annual interest credit that is based on the price change in a selected equity market index. While it typically credits part of the upside change in an index, it will not credit less than 0 percent, thus protecting principal and accrued interest.
