With boomers poised to leave the workforce en masse, financial services companies have inundated the market with income riders for annuities. The proliferation of these products have left the typical advisor in a conundrum as they try to stay on top of all of potential client solutions. This second part explains the differences between fixed income and variable annuities with guaranteed lifetime withdrawal benefits and advice on choosing the right choice for your client.
Differences between FIAs and VAs with GLWBs
Both exhibit the same potential benefits and shortcomings as noted in part one. However, besides the principal protection, there is another key distinguishing characteristic between the two: the level of fees charged against the account. The fee for a GLWB on an FIA is typically a fraction of the cost of the rider on a VA. Furthermore, the total fees on a VA with a GLWB can be several multiples of the fees on an FIA with a GLWB.
The key implications to the principal protection and fee differences between the two are:
- When the total fees in a VA with a GLWB are taken into account, the reduction in the expected performance of a VA may bring it closer to what would be expected of a fixed annuity. It becomes more "bond" than "equity."
- A GLWB with a feature set (i.e., annual increase on the income base and guaranteed withdrawal factor), costs substantially less to deliver on an FIA platform than on a VA platform.
In combination, these two differences suggest that an FIA with a given GLWB may deliver relatively the same amount of guaranteed income as a VA with the same GLWB, but with principal protection. In fact, it is not difficult to imagine cases where some FIAs with a GLWB could deliver more guaranteed income, higher account values and principal protection than some VAs with GLWBs for a given client.
Which GLWB is better?
It depends. Clearly, one cannot make a valid comparison simply by looking as the design features of the GLWBs and the underlying products to be compared – there are just too many moving parts. A financial technician can certainly develop comparative measures to make an assessment. With technology, it is certainly possible to build tools that can provide a convenient comparative analysis.
Furthermore, how do distribution gatekeepers select which products are best for their advisors to offer clients, and which are not? It certainly raises the issue of due diligence and the methodologies used in making that selection.
Conclusion
GLWBs on VAs and FIAs offer valuable benefits for managing risks in retirement though there are some soft spots. There are also feature differences between riders and between the two product types. Gatekeepers are faced with a tremendous challenge in developing a clear and valid financial basis to determine which products and riders should be offered on the shelf to their advisors. A comparative tool is sorely needed to help distributors and advisors exercise due diligence and ensure that what they offer is suitable for their clients.
Garth Bernard is president and CEO of Sharper Financial Group LLC. He has more than 25 years of experience developing fixed, variable, indexed and income annuity products. He developed the insurance industry's first general-account fixed-indexed annuity option for the retail market in 1992–the catalyst that sparked the growth of the modern fixed-indexed annuity market." You can contact him at garthbernard@sharperfinancial.com or http://www.sharperfinancial.com.
Andrew Robertson is President of Capital Indemnity Group LLC. Capital Indemnity Group is an insurance marketing and consulting firm focused on developing risk management tools and strategies for financial advisors and their clients. You can reach Roberstson at arobertson@capitalindemnitygroup.com.
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