In part one, I detailed the three elements to take into consideration when comparing annuities with riders: the economic value of lifetime income, legacy potential and the depletion rate. In this part, I will go over some benefits to using an effective model for comparing annuities with income riders.
A sound model could have many benefits for advisors and distributors who recommend annuities:
- It would provide a measure of the true value of an income rider that is easy to apply in practice. Such a measure could be used in absolute terms to compare the benefit of an income rider to other non-income-rider vehicles.
- A sound model would allow different annuities with income riders to be ranked in terms of the overall economic value they deliver in regards to all three needs: income, legacy and liquidity.
- In addition to comparing annuities of the same type, an effective model would allow advisors to compare different types, such as variable annuities to fixed indexed annuities to fixed annuities.
- Advisors may be better equipped to choose among competing products and competing income riders in order to select which may be optimal for a particular client situation.
- Distributors may be better equipped to select the annuity products and income riders to be placed on the shelf.
- The legal and regulatory annuity challenges advisors face, whether registered or unregistered, is being ratcheted up. An academically robust method used in the selection of an annuity is more likely to withstand the harsh scrutiny of a compliance or regulatory spotlight.
- With sufficient use, advisors are more likely to develop a better gut feel to “see through” clever income rider designs that may appear more valuable on the surface.
Given the sheer volume of annuities and annuity types available and the complexity of annuity and income rider designs, it is vital for advisors and distributors to become adept at quantitative analysis of the available options. Advisors and distributors who rely on overly simplistic methods for comparing income rider options may be faced with untenable legal and compliance risks.
For more articles on income riders, check out: