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Life Health > Annuities > Variable Annuities

A New Breed of Variable Annuities

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VAs that wrap around qualified assets, like IRAs, are now gaining traction in a fitful economy.

Just in case anyone needed reminding, the stock market’s latest fit of volatility this summer reinforced to advisors and their retirement-minded clients the importance of protecting qualified assets. So it’s no wonder that a breed of variable annuity built to underpin qualified individual retirement accounts with income and death benefit guarantees is finding a stronger foothold in the annuity market.

Indeed, sales of variable annuities in a qualified setting now outpace sales of nonqualified VAs by about two to one, according to the Insured Retirement Institute. Meanwhile, an estimated 60 percent of VA contract assets now reside in qualified accounts. As more investors and advisors evidently see the merits of using an IRA-based variable annuity as an insurance wrapper around their qualified money, insurers such as Lincoln, John Hancock, Western & Southern and others are taking direct aim at that segment with a growing variety of IRA-tailored offerings designed specifically to capture qualified retirement plan money.

“They’re really targeting those 401(k) and 403(b) [retirement account] assets,” observes Kevin Loffredi, vice president, annuity solutions, at Morningstar, Inc., in Chicago. “When you look at the numbers–where the money is going, qualified versus non-qualified–the majority of the money [being used to purchase variable annuities] is coming from qualified accounts.”

What about the argument that owning a VA inside a qualified account makes little sense because of tax-deferral redundancy? Why put a VA with tax-deferral qualities inside an IRA where assets already get tax deferral? Yet nowadays many investors and their advisors appear content to live with that redundancy in order to protect IRA holdings with insured living and death benefit guarantees while also gaining access to upside market potential.

“The tax deferral [aspect of the VA] is moot, so really you’re buying this for the death benefit, and even more so, for the living benefit–the guaranteed lifetime income,” says Loffredi.

“It’s for folks who are either in retirement–in the distribution phase–or preparing for that phase of their life,” adds Mark E. Caner, Cincinnati-based president of W&S Financial Group Distributors, Inc., the wholesale distribution subsidiary of Western & Southern, referring to his company’s Variable Annuity for Roll Over Only Money (VAROOM).

W&S touts VAROOM as the first VA to invest in ETF subaccounts. As its name suggests, it is aimed at retirees and job-changers seeking a home for qualified rollover money. The tax structure of the product–a VA inside an IRA–gives investors direct access to individual ETFs from iShares and Vanguard across a range of equity, fixed income, international and alternative asset classes. And because those ETFs are passively managed, their lower expenses translate into a lower-fee VA.

The VA inside an IRA segment
VAROOM has company in the VA-inside-an-IRA segment. For example, MetLife offers its RMD-friendly guaranteed minimum income benefit, GMIB Plus III, with some of its variable annuities purchased with qualified money. The optional feature allows the contract holder to take RMDs while maintaining and potentially growing the income and/or death benefit.

For participants in its employer-sponsored retirement plans, Lincoln offers the ChoicePlus Rollover VA, a product built for rollover money from investors who are nearing retirement and/or transitioning from a former employer’s plan. It features investment options from Lincoln’s Elite series of funds, along with reduced mortality and expense fees, multiple death benefit options, optional living benefit guarantees and no surrender charges for rollover money.

A VA available only to terminating or retiring 401(k) plan participants with John Hancock who have money in the Guaranteed Income for Life option within the plan, Hancock’s GIFL Rollover Variable Annuity IRA allows investors to maintain the benefits of the Guaranteed Income for Life option: downside protection, upside potential and lifetime income. For a fee, it also offers optional step-ups on each contract anniversary.

Besides differentiators like direct access to ETFs inside a variable annuity, insurers are finding other ways to pitch their qualified VA products. W&S, for example, is positioning VAROOM as a lower-cost option, with fees that average 255 basis points compared to 332 basis points for a typical VA, according to Caner. The basic guaranteed withdrawal benefit option on the VAROOM also costs less than other GMWBs–60 basis points, compared to 105 for the average VA living benefit, he adds.

“This is a way [for insurers] to go right at the issue” that many investors and advisors have with high VA fees, says Loffredi.

A compelling case
Taken as a whole, says Loffredi, the value proposition offered by qualified variable annuities–the ability to wrap one’s retirement nest egg with protective features such as a death benefit and lifetime income, each guaranteed by an insurance company–is increasingly compelling to people either entering or already in retirement. “When you have $200,000, $300,000 or more in 401(k) assets, that’s something that needs protecting. When you have an option that allows you turn those assets into a guaranteed stream of income for life, that really starts to mean something to people,” Loffredi explains.

And as this summer’s stock market instability demonstrated, having an insurance-based lifetime income guarantee inside the retirement nest egg provides investors and their advisors with peace of mind in times of economic turmoil.

Says Loffredi: “The client who has that living benefit is more likely to stay the course with their retirement plan, knowing their income can only go up during retirement.”

Why annuities belong inside a retirement nest egg:
A recent analysis by Peng Chen, PhD, CFA, president of Morningstar’s Global Investment Management Division, provides compelling reasons for investors to allocate a portion of their retirement savings to an annuity with income guarantees.

According to the report, longevity risk and financial market risk are two of the biggest threats to the retirement nest egg. While Chen doesn’t specifically suggest using qualified assets to purchase an annuity, his analysis does emphasize the important role an annuity investment can play inside a retirement portfolio.

“Investors can mitigate both longevity and investment performance risk,” he writes, “with a carefully constructed combination of longevity-insurance products, such as fixed lifetime immediate annuities (SPIA) and variable annuities with a guaranteed lifetime withdrawal benefit (VA+GLWB), which offer investors a guaranteed income stream, and traditional assets, such as ETFs and mutual funds.”

How much of the retirement nest egg to allocate to an annuity, and the type of annuity in which to invest, depend largely on the investor’s long-term intentions, according to Chen. “Clients who want to spend their retirement income in their lifetime…should have a larger allocation to longevity insurance, with the allocation tilted toward immediate fixed annuities instead of VA+GLWBs. Clients who want to leave the largest possible bequest to beneficiaries need less longevity insurance. And the allocation within the annuities portion should tilt more to VA+GLWBs because the contract value is paid to the investors’ beneficiaries on death.”


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