Generating enough retirement income continues to be a top concern among investors today and while annuities can be a helpful solution to achieve that goal, there are a lot of options out there and making the right choice can be confusing. Combine that with the fact that not all annuities are created equal and the variable annuity landscape is always changing, and it just became even more confusing.

In the past, advisors’ perceptions of variable annuities haven’t always been positive. Following the economic crisis in 2008-2009, annuity insurers responded with decreased benefits, increased costs and additional investment restrictions, thereby making variable annuities too expensive and too complex for some advisors to consider.

Then in 2012, the Taxpayer Relief Act started to hit the wallets of investors and as a result, tax-deferred accumulation became even more important. Advisors found themselves not only looking for investment vehicles to help with tax-deferred accumulation, but were also in search of new ways to balance portfolio risk through the use of non-correlated assets in the form of alternatives. But alternatives were not particularly tax efficient, which is why it made sense to use them inside a tax-deferred variable annuity. This type of investment also allows for diversification for non-correlated asset classes which is helpful during volatile markets.  

Advisors are always searching for ways to provide value to existing clients by introducing new investment options and they are always in pursuit of ways to capture new assets. As the new year dawns, this could be the perfect time to look at your current book of business and reevaluate investments to make sure they are still a good fit. Or perhaps a clients’ situation has changed and now is the time to introduce a new investment option. There is also a lot of money in motion so advisors may be on the pursuit for ways to capture new assets.

As mentioned, because not all variable annuities are created equal and the landscape is always changing, it can also be difficult to keep up with the different types of investment solutions in the marketplace, the intricacies of how they work and determining which product is right for which client. All of which make it even more challenging to introduce new investment options. But what if there was a simple option that met your client’s needs?

Although not new to the variable annuity landscape, there is a renewed focus on Investment Only Variable Annuities (IOVAs) and they certainly deserve consideration.    

The Definition

Investment-Only Variable Annuities (IOVAs) have gained popularity recently. They are straightforward, easy to understand and offer a wide variety of investment options such as underlying funds including alternatives. IOVAs provide a simple way to set aside taxable assets beyond a 401(k) in a tax-deferred investment solution and they also allow for diversification with non-correlated asset classes. IOVAs are typically available at a lower cost compared to traditional benefit-rich products where the client may pay hefty fees for other benefits.

Tax deferral, low cost and vast investment options are key to giving advisors what they need to implement an effective management strategy. Of course, variable annuities are still investments subject to market fluctuation and risk, including possible loss of principal invested.

After understanding what an IOVA is, the next step is to consider who might be a good fit for this solution and what type of client may benefit from it. 

Which Clients Fit the IOVA?

IOVAs may be a good option for certain clients. As mentioned, IOVAs are a tax-smart way for clients to save for retirement beyond their 401(k) plan – so, this is a good solution for clients that have maxed out their 401(k) or other qualified plan investments.

But before making any hasty decisions when evaluating the IOVA choices available to current and potential clients, run through the points below to make sure it is the right fit. An IOVA could be a good fit for clients who are:

  • in a higher income bracket but expect to be in a lower tax bracket when they retire
  • looking for a simple and easy-to-understand retirement program
  • seeking to provide a legacy to their heirs
  • exposed to tax inefficient investments
  • currently in annuities, but needs or goals may have changed
  • Are aware that withdrawal of tax-deferred accumulations are subject to ordinary income tax, withdrawals made prior to age 59 ½ may incur a 10% tax penalty.

– See the concluding article in this two-part series: Investment-Only Variable Annuities, Pt. 2: The Importance of Due Diligence