It’s been a so-so stretch for variable annuity (VA) sales. According to LIMRA Secure Retirement Institute, VA sales fell 5 percent in 2014’s second quarter, totaling $36.2 billion. Year-to-date, VA sales reached $70.4 billion, a 4 percent drop from 2013. 

One factor behind that trend could be issuers’ shift away from guaranteed living benefits (GLBs).

According to LIMRA Secure Retirement Institute, “many of the top VA sellers are focusing on diversification of their VA GLB business. In the second quarter, a few of the top companies entered the market with accumulation focused product without a GLB rider.”

That doesn’t mean buyers don’t want GLBs: The Institute notes “Election rates for GLB riders, when available, were 78 percent in the second quarter of 2014.”

When VAs Work

The demand for GLBs shows that the investors still perceive a benefit in the riders. And in the right circumstances GLBs make sense, such as in the case of a client about to retire, says Jason Dudum of Dudum Financial and Insurance Services Inc. in Lafayette, California. When Dudum recommends VAs he typically uses the GLB riders, he explains, because he’s using the annuities for income. He cites the example of a client with $1 million in retirement plan assets who estimates his fixed monthly expenses to be $5,000. The client’s pension and Social Security benefit will cover $3,000 of that amount.

In a case like this, says Dudum, it can make sense to invest $500,000 in a VA with a 5 percent guaranteed lifetime withdrawal benefit (GLWB). The contract will provide $25,000 per year or roughly $2,000 per month to cover the client’s income shortfall. That arrangement allows Dudum to reassure the client that regardless of what happens in the investment markets, the client will receive $5,000 per month income for life.

Dudum uses VAs for qualified money and prefers that clients keep non-qualified funds in more liquid accounts. His reason: Qualified money gets taxed upon withdrawal, which reduces the likelihood of an investor withdrawing a lump sum. GLWB-based withdrawals work well within that discipline.

Caveats

VAs aren’t a panacea, he cautions, because the fees and surrender charges can be high. In cases where the client doesn’t need a pension-like income, Dudum uses a traditional managed account approach. 

He also cites changes in the VA-marketplace as a consideration because GLB terms have become less generous. But there’s a benefit from that trend, he notes. Because rates have been low for a while, GLB terms appear to be stabilizing. Also, the reduced number of issuers in the market makes it easier to evaluate VAs, he maintains: “The positive (side to that) is that there aren’t that many carriers to look at so it makes our job a little easier to find the best options.”