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October 01, 2012 at 10:03 AM
When is the last time you saw a penny in the street and stopped to pick it up?
Most likely, it’s been awhile, and with good reason. Over time, the penny has lost its value, to the point that the U.S. Government has considered decommissioning the penny as official currency. In fact, it now costs more money to manufacture a penny than that penny is worth.
But what if I told you a penny could be worth as much as $100,000. Would you reconsider? Although not many are in existence, the 1943 Copper Wheat Penny has attained great value amongst collectors–certainly enough to make someone think twice before walking past a lonely penny without at least checking the date.
So what does that have to do with variable annuities?
The penny example is actually a great way to illustrate how a slight change in perspective can lead to innovative new thinking about the benefits these products provide and different ways they can deliver those benefits. As part of this discussion, it’s important to understand that variable annuities can help meet your clients’ long-term retirement goals by providing tax deferral1, a broad range of investment options, a death benefit and guaranteed lifetime income, along with optional riders and benefits that may be available for an additional cost.
Innovation needed
Although the annuity industry often notes the innovation that has taken place over the last decade, advancements with living benefits on variable annuities have been slower to occur. In fact, many of today’s living benefits don’t look much different than they did 10 years ago, with several carriers pulling back benefits or leaving the market altogether.
The “arms race” that occurred with living benefits on variable annuities a decade ago has turned into a race for survival today as many carriers seek to deliver the type of innovation that may be needed in today’s low interest rate, high volatility environment–a new way to help protect purchasing power once the contract holder starts taking income.
Traditional guaranteed roll-up benefits have been utilized by many people who own variable annuities within their retirement plan. These benefits, which typically provide an annual increase to the benefit base (a value that may be used to determine income payments), can be an effective way for people to incorporate some guarantees into their retirement planning while continuing to build their contract value.
In the past, product manufacturers have offered consumers higher roll-up amounts and have also increased the frequency with which those roll-ups are awarded. This may be appropriate for people that are still building their retirement savings. Baby boomers–especially those boomers in the crucial transition phase five to 10 years before retirement–need to start thinking about retirement income. Therefore, they may want to review their situation to determine if this type of benefit is appropriate for them.
New perspective leads to innovation
This brings us back to the discussion of how viewing a penny in a new light can trigger different opinions about things we’ve previously taken for granted. For example, new innovations within some living benefits in variable annuity contracts are changing the way we think about generating retirement income.
This illustrates the profound impact that sequence of returns can have on retirement savings. If returns start out negative, money can run out more quickly than anticipated, making it more difficult to rebuild assets from those initial losses and get them back on track to extend the life of their savings. Yet, by incorporating a variable annuity with living benefits that offer the potential for increasing income, that same retiree can add a level of protection against sequence of returns risk.