There are numerous tools available to advisors looking to help their clients chart a prudent course on the road to a comfortable retirement. An often useful but sometimes misunderstood vehicle in this regard is the variable annuity (VA). In this and the following series of blog posts, we hope to help advisors better understand how VAs work, how to get the most out of them and where they fit in client portfolios.
If advisors have some confusion about VAs it’s not surprising. The majority of variable annuities are loaded up with all kinds of guarantees and riders, making these products both complex and expensive.
On top of that, every provider has put its own spin on the variable annuity as it strives to separate its product from those of its competitors. Those product differentiators are primarily on the surface, and once you dig down to the bedrock layer, it becomes obvious that all VAs share certain fundamental traits. Once advisors understand the mechanics, discerning the differences between competing products and fitting them into portfolios should be a much simpler process.
Many advisors have sold VAs because they have income guarantee features. These are mostly either Guaranteed Lifetime Withdrawal Benefits (GLWB) or Guaranteed Lifetime Income Benefits (GLIB). We will dive deeper into the mechanics of each type in the next two posts, but for now let’s just say that when advisors recommend VAs to their clients, many are purchased as accumulation products with retirement income a possible future option. The general idea is that one day the client will have to take that income, but in the interim, they are guaranteed a specific return annually for some number of years.