Close
ThinkAdvisor

Retirement Planning > Retirement Investing > Annuity Investing

Advising on guaranteed living benefits

X
Your article was successfully shared with the contacts you provided.

Guaranteed living benefits remain popular with indexed annuity and variable annuity (VA) buyers. According to LIMRA Secure Retirement Institute, the guaranteed living benefits election rate in the third quarter of 2014 was 69 percent with indexed annuities and 76 percent for VAs (when available with the contracts).

I recently spoke with Matt Hoesly, an advisor with Resource 1 Inc. in Norfolk, Virginia, to learn how he’s been successful using these riders with clients.

LifeHealthPro: What’s your general sense of developments with these riders?

Matt Hoesly:   With pensions disappearing, the need and the demand for annuities and these guaranteed withdrawal benefit riders has really increased in the past five to 10 years, I would say. Many of the older contracts that had the initial withdrawal benefit riders are very strong. They have high promised benefits and they have low costs compared to riders currently available. One thing we’ve seen is that the companies that issued these really strong benefits will no longer accept new money into those old contracts. You would have to do a new contract with their updated rider and many times the benefits have gone down and the cost has gone up over the past couple of years across the board. It was kind of an arms race to see who could offer the best benefits and now they all have pulled back and no longer offer as rich of a contract. But the ones that still exist are still reasonable and do have a role in retirement income planning.

LHP: With which type of annuities—VAs or indexed—are you using these riders?

Matt Hoesly: We typically stay away from the fixed indexed products. The indexed product cap- and participation-rates have come way, way down, meaning that if the market is up 10 percent you may only get 2 percent of that. We made a decision that you’re either going to take the risk that you want to try to keep up with inflation and go the variable annuity route or if you’re completely risk-averse and you don’t want to take the chance of fluctuation, then we would look at more of just a regular fixed immediate annuity or a fixed deferred annuity for that income portion.

LHP: With VA contracts, when do the riders make sense for the client?

Matt Hoesly: When somebody doesn’t have enough guaranteed income to cover their basic living expenses, that’s when we would look at any sort of annuity for them. As I said, with pensions disappearing, it’s more and more important to make sure that you at least have your basic living expenses covered and you know that you can’t outlive that. The other thing that we look at with clients is they need to have some other investments. You don’t want to have everything locked into one of these contracts because then if you have an emergency or you need money they’re not as liquid as you would need for an emergency fund.

LHP:   Living benefits riders can be difficult to evaluate. How do you present them in a way that clients can understand and then make an informed decision?

Matt Hoesly: A lot of times they can be incredibly confusing; we often try to use pictures. The carriers have some good examples where we can show clients hypothetical examples of how the account value and the withdrawal benefit would work in actual situations where the market goes up, the market goes down or the market stays flat. That helps a lot. We also explain to the client that the contract consists of a real account value, which is what your investments are doing and if you decided to cash in that account, that’s what you would get. Then there is the withdrawal benefit side, like a paper account value that they do the accounting for and that’s where your withdrawal percentage comes from.

LHP: Have you noticed any other trends among living benefit riders?

Matt Hoesly: We’ve been seeing that these withdrawal benefit riders are becoming more available within 401(k) plans. A lot of the providers are adding these options on their 401(k) platforms where participants can choose to do it. That may be something to look at, too. Clients may already have the choice to use something like this within their 401(k) plan.

___________

Matt Hoesly is a registered representative of Ceros Financial Services, Inc. and an investment advisor with Resource 1, Inc.  (Resource 1 is not affiliated with Ceros Financial Services).

The opinions expressed are those of Mr. Hoesly and do not necessarily reflect the opinions of Ceros Financial Services, Inc., its affiliates or employees.