Though the problems plaguing the variable annuity market have been widely publicized in recent years, for many clients, the appeal of pairing market participation with the guaranteed lifetime income that can be purchased in rider form remains unscathed.
Unfortunately, many clients fail to engage in the cost-benefit analysis that can help predict whether the cost of the guaranteed income rider is worth the benefit that it can provide. Often, clients who do carefully analyze the potential return on guaranteed income riders are finding that in today’s market, the costs simply exceed the benefits.
Luckily, a strategy has emerged to allow clients to reap the benefits of both market participation and income guarantees should the markets underperform by using a combination of variable and deferred income annuities to more accurately reflect the reality of today’s annuity investment landscape.
The Problems With Guaranteed Income Riders
In the minds of many clients, pairing a variable annuity with a guaranteed income rider can neutralize the risks associated with variable annuity investing because the rider will provide a guaranteed level of income in the event that the variable annuity itself underperforms.
However, these clients often fail to consider the costs associated with guaranteed income riders—rather than paying for the entire value of the rider up front, the cost is generally assessed on a periodic basis over the life of the rider. In other words, the longer the client lives and collects guaranteed income benefits under the rider, the higher the cost of the rider itself.
In the past, it may have been possible to offset these costs by allocating variable annuity funds to riskier—and potentially more lucrative—investments so that the income rider could more accurately be characterized as a fallback option. Modern-day variable annuities, however, often require the client to diversify investments among more conservative options in order to limit the risk exposure of the insurance company that issued the contract.
Further, many companies have sought to modify the terms of older annuity products to require that investments be allocated more conservatively. The end result is that the client’s upside potential on the variable portion of the annuity is limited while the cost of purchasing the income guarantee is rising.
The New Variable-Deferred Annuity Strategy