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Best Interest for Conservative Investors

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Let’s compare the projected performance of a typical variable deferred annuity with a no-load mutual fund for a conservative investor.

With the Best Interest sales standards in mind, and using proper analytical tools, here’s what I found: Traditionally, contracts have been compared one feature or facet at a time.  However, different facets interact. You must consider each contract as a whole.

(Related: Best Interest Standards, Change and Deferred Annuities)

Here are just some of the tradeoffs that can complicate a simplistic comparison of the highlighted “product features”:

The Highlighted Feature The Related Tradeoff
Lower fees Lower benefits
Guaranteed living withdrawal benefit fund with higher Crediting Rates Lower payout rates or subaccount restrictions
Step-up options Situations in which exercising these provisions leads to terminations of other benefits, or delays in a client’s ability to exercise certain benefits
Sign-up bonus Recapture on surrender, higher fees, benefit deferrals
Lower surrender charges Higher fees
Unrestricted subaccount selection Higher fees for high-volatility subaccounts

You’d get a skewed view of the proposed contract if you looked only at the kinds of highlighted product features listed above. What counts is what actually ends up in the policyholder’s pocketbook.  You can determine that only by looking at both columns. In other words: The whole cash flow that the features and the related tradeoff provisions generate together.

Higher commissions generally lead to more tradeoffs. The commission challenge is for advisors to find the right product, where the advisors can earn a reasonable compensation for their due diligence and also act in their client’s best interest.

When I ran my comparison for this article, I deliberately picked a typical variable deferred annuity. In other words, one with relatively high fees and charges.

Because the client in this comparison a risk-averse client, the client’s no-load mutual fund subaccounts will be low-risk.  Replace that fund with a variable deferred annuity with a guaranteed living withdrawal benefit and the variable deferred annuity subaccounts can be more aggressive. Why? Because variable deferred annuities are not solely investments. They’re also insurance products. The guaranteed living withdrawal will lessen the impact of any downsides.

The Plan: Fees were 1% for the conservative (low volatility/risk) subaccounts, 1.5% for the aggressive (high volatility/risk) ones with a mortality and expense charge of 1.05%. Surrender charges in first seven years of 7%, 6%, 5%, 4%, 3%, 2%, 1%. Charge-free withdrawals of 10% are allowed, starting in year two. The plan was single ownership, but with a joint option for income benefits. Commission was 5% of initial premium.

The Guaranteed Income Rider: The guaranteed living withdrawal benefit rider’s minimum base is a shadow fund with an annual 5% compounded growth. The cost was 1.5% of the account value, per annum. Payout rates for ages 65 through 67 were 5.1%, 5.29%, 5.5% for single life and 4.31%, 4.41%, 4.5% for joint lives. In all cases below, the conservative investor elects this rider.

A Diligent Set of Scenarios: Testing a few cherry-picked scenarios was simply inadequate for this task. With a large, representative sampling of scenarios, the only way to make the calculations tractable was to use a stochastic method.  This automation provided a major facet of due diligence, with relatively little effort.

The Runs: To value the plan, I used the BI-SEM Evaluation Method to run stochastic simulations. All runs used the exact same 1,001 economic scenarios.

The Results

Here’s a summary of the results. (Go here for complete technical analyses.)

Note that, for this table, longevity was estimated with an online app.

Single Premium Sex Target Retirement Age Target Age Range Estimated Longevity Issue Ages (M/F) Tax Qualified
$100,000 M 65 65-67 M-81, F-87 55, 53 Yes

Here, the carrier’s A.M. Best financial strength rating is A plus.

Comparison to a no-load mutual fund based on the client having a conservative risk appetite.

Any percentile evaluation less than the single premium is bested by the no-load mutual fund. (A variable deferred annuity’s percentile evaluation less than the single premium, is bested by its no-load mutual fund equivalent, because the no-load mutual fund would require less than the single premium, to fund the variable deferred annuity’s future net payments to the client.)

Reference Number Variable Deferred Annuity Subaccounts Used Performance Percentile


25 50  (Median) 75


1 Conservative 65,471   94,806 103,888 112,580 152,637
2 Aggressive 70,216 105,485 117,965 143,259 722,042
3 Ultra-Aggressive 71,665 103,406 117,571 160,603 1,539,268

Estimated Longevity Male 87 Years, Female 89 Years

Reference Number Variable Deferred Annuity Subaccounts Used Performance Percentile



50 (Median)

75 100
4 Conservative 76,639 109,767 119,833 129,547 174,615
5 Aggressive 87,276 122,533 137,732 169,975 873,986
6 Ultra-Aggressive 83,815 120,332 137,243 200,262 1,863,187

The guaranteed living withdrawal benefit that comes with this variable deferred annuity prevents substantial losses in the lower percentiles. Even with high fees, charges, and commissions, the variable deferred annuity outperforms the no-load mutual fund.

The aggressive type subaccount selections performed the best. The ultra aggressive types had the highest median values, largest upsides, and moderate downsides.

If allowed, this should be the option for a conservative investor.

Another conclusion is that longevity has a significant impact. (Make sure to use the best app to generate the longevity estimate.)

Still another takeaway here is that commissions and best interest are not mutually exclusive. Use a good evaluation method, such as BI-SEM or similar. Doing this kind of comparison is too complex otherwise.

Finally, generalizing about annuities is not recommended. Individual cases must be examined and compared.

Good deals can be found. However, advisors need to invest the time and effort and, use the right tools to identify them. Here, I picked a typical variable deferred annuity. A more competitive one would perform even better.

A dedicated effort is not a one-off endeavor.  Use it to earmark the best deals for both current and future clients.

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James KavanaghJames Kavanagh is the organizer of BI-SEM, a nonprofit group that’s trying to develop a method that advisors can use to update deferred annuity valuations.