Several years ago, I wrote an article headlined “Variable Annuity Living Benefits: What The Fine Print Won’t Tell You.”
At the time, nobody else was writing about the complexities and long-term cumulative costs of the living benefit riders that many advisors attach to VAs, to guarantee clients a lifetime income.
Since then, the complexities and costs have increased as one insurance company after another tries to manage the liabilities of these riders with investment restrictions, or escape them with buy-out offers.
The stock market’s big rally has created a perfect storm for VA living benefit riders, because they often lock in retirement income levels near the top of a market cycle. Unless VA-writing insurance companies are heavily hedged against a market downturn, they are potentially vulnerable.
Now, the mainstream financial media is waking up to these issues, including an insightful article by Ben Mattlin in Financial Advisor.
The article notes that the VA rider’s cost usually continues for as long as the contract. It quotes one financial advisor who says that over 20 years, cumulative all-in costs in a VA, bought for $200,000 with an income rider, can be as high as $140,000. The longer you live and receive income, the more you pay for the rider privilege.
Fortunately, an alternative to VA living benefit riders has come on the scene, and it has two advantages you may not have considered:
First, you can evaluate and lock in the cost of a guaranteed income-you-can’t-outlive at the time of purchase, regardless how long you live.
Second, you can diversify between two insurance companies – so the income guarantee isn’t backed by the same company that issues the VA.
The strategy is just this simple: 1) Buy a VA without income rider; and 2) Add a deferred income annuity (DIA) with a lifetime payout that begins at the first age there is a realistic possibility withdrawals will deplete the VA. In most non-qualified DIAs, the maximum issue age is 80-90. The later in life a DIA income begins (the Annuity Commencement Date), the more affordable the longevity protection becomes. In any case, the DIA’s cost can be paid once, at issue, and locked-in for life.
This choice has been enabled by the growth of DIAs since their introduction in 2010 and also by their competitive rates. A nice feature of this strategy is that it can pay a lifetime income whether or not: 1) the VA is annuitized; or 2) income withdrawals deplete the VA account. A GMIB only works if the VA is annuitized. A GMWB only pays out if withdrawals drive the VA’s account value to zero.
You can read more about the recent growth and applications of DIAs here.