VA feedback requested

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Oct 24, 2008 3:46 pm

For as long as I have been in this business, I have struggled with the whole idea of how variable annuities fit into clients' financial plans.  I have mostly been against them in my career for the same reasons they've gotten so much negative press.  But now, with some of the GMWB riders that are available, I'm thinking that VAs may have a place, particularly with (dare I say) qualified money, at least conceptually anyway.

 
While the fees are so high in VAs, the actual cash value of qualified money would seem to me to be significantly less important to most investors (whether they realize it or not) than its ability to generate income/RMDs over a long time period.  After all, barring a catastrophe, who is going to be likely to cash out a significant portion of their IRA money in any given year?  Practially speaking, this money is only really good for income.  And unless I've completely misunderstood, the income guarantees are net...so the fees will come out of the higher of their cash value or income value but not their actual income.
 
I have come to think that having an income stream that can go up (at least theoretically) but will never go down AND the client does not have to give up all control to capital--on money that is ultimately only FOR income--seems to be worth a significantly higher fee structure.  But I think that this concept really applies mainly to those in or very near retirement.
 
Thoughts?
 
 
 
Oct 24, 2008 3:59 pm

I think you are so late to the party that you have A LOT of catching up to do. 

Oct 24, 2008 4:09 pm

Indy,

I understand your previous trepidation.  I met with Jesus the VA salesman about 6 months ago.  He told me that living benefit annuities can be a good product (especially in qualified accounts), and that most people only care about a guaranteed income stream.

Oct 24, 2008 4:13 pm
gvf:

Indy,

I understand your previous trepidation.  I met with Jesus the VA salesman about 6 months ago.  He told me that living benefit annuities can be a good product (especially in qualified accounts), and that most people only care about a guaranteed income stream.

 
The vast majority of the VA's I do are in qualified accounts.  It is a simple conversation..."Let's turn your IRA/401k into a pension".
 
But don't underestimate the possibilty of just how wildly popular NQ VA's can be when tax rates go up.  And due to the recent slightly negative returns in the market, many people will have priority #1 as income that can't be outlived, instead of leaving as much as possible to their bene's.
Oct 24, 2008 4:30 pm

as long as the insurance companys can pay.

Oct 24, 2008 4:37 pm
ezmoney:

as long as the insurance companys can pay.

 
That is the risk of course.  That is why I changed how I allocate the sub-accounts.  I used to take as much risk as possible when possible while having the guarantee there.  But in case things don't work out in the future with these insurance companies, I am not allocating as risky.
 
Here's the trade off I see:  Is it worth the extra 1-1.5% for the hope that the insurance company meets these obligations?  I take the bet. 
Oct 24, 2008 4:55 pm
snaggletooth:
ezmoney:

as long as the insurance companys can pay.

 
That is the risk of course.  That is why I changed how I allocate the sub-accounts.  I used to take as much risk as possible when possible while having the guarantee there.  But in case things don't work out in the future with these insurance companies, I am not allocating as risky.
 
Here's the trade off I see:  Is it worth the extra 1-1.5% for the hope that the insurance company meets these obligations?  I take the bet. 
 
Thanks for the feedback.  I have only seen one VA (Jackson National) that will allow you to swing for the fences when using these types of guarantees.  Can you tell me who some of the others are?  I 'm not as interested in being aggressive as I am in just not being force-fed their allocation models.
 
Oct 24, 2008 5:10 pm
IndyIndy:
 
Thanks for the feedback.  I have only seen one VA (Jackson National) that will allow you to swing for the fences when using these types of guarantees.  Can you tell me who some of the others are?  I 'm not as interested in being aggressive as I am in just not being force-fed their allocation models.
 
 
JNL now has some alternative sub-accounts that I like.
ING has a very good product and I think they generally take less risk as an insurance company than most of their peers despite recent headlines.
PRU has a product that I like a lot now with the best sub-account choices and flexibility in most areas including a LTCi feature for those that don't have LTCi.
 
As an indy, those are my three favorites, especially for the GMWB rider.  Going forward though, I will be breaking up large accounts into 2 or 3 different annuity contracts with the above companies to diversify that risk out a little.
Oct 24, 2008 5:14 pm

Snags, have you looked at the Principium2 with Transamerica?  They have two ETF portfolio options which really cuts the expenses down, GWLB + growth rider, or a sweet death benefit for the sick clients, and a LTC option. 

What Prudential one are you using?  I'm looking for a 2nd carrier to split up some of the larger tickets. 

Oct 24, 2008 5:28 pm

Yeah, me too.  I also play an active part in reviewing the investment options in these VA's (i.e. change and/or review once or twice a year).  I believe that I should still to do my best to preserve that cash value even though there's that guarantee.   Some of these VA's have index fund options which also cut down the cost.  I'm a little on the aggressive side of the range of my client's asset allocation on these VA's compared to their comparable wrap accounts.

Haven't used it but the Prudential Apex II with the Highest Daily Lifetime Seven (i.e. 7% growth factor) GMIB rider but it looks attractive.  Downside is you cannot take withdrawals during 10-year accumulation period or the rider terminates.   It MAY be suitable for qualified accounts that a client wouldn't touch anyways for 10 yrs.

Oct 24, 2008 5:33 pm
gvf:

Snags, have you looked at the Principium2 with Transamerica?  They have two ETF portfolio options which really cuts the expenses down, GWLB + growth rider, or a sweet death benefit for the sick clients, and a LTC option. 

What Prudential one are you using?  I'm looking for a 2nd carrier to split up some of the larger tickets. 

 
I haven't looked at Transamerica since I was at Merrill years ago.  I remember the thing I didn't like about it was that the advisor had to manually lock in the step-ups.  That has probably changed since then.
 
Regarding the ETF's and fees, that was my mindset...go with the cheapest sub-accounts to cut back on fees.  Well, I would rather pay the extra 20 basis points to be in a fund that is only down 25% versus the ETF down 40% at this point.  I think the ETF's and UIT's are good for a portion of the sub-accounts.
 
The PRU product is their HD7 Apex II (which is the 4 year).  They have a wide variety of sub-accounts and their alternative styles are very good, plus they have First Trust portfolios, so you have a lot of options.
Oct 24, 2008 7:17 pm

VA's are designed for qualified accounts There are many different guarantees available,  income, principal guarantees, to death benefits.  The subaccount options have gotten significantly better too.

 
If you arent offering your clients VA's, a Real Advisor is...
Oct 24, 2008 7:59 pm
snaggletooth:

[quote=gvf] I haven't looked at Transamerica since I was at Merrill years ago.  I
remember the thing I didn't like about it was that the advisor had to
manually lock in the step-ups.  That has probably changed since then.


 
They're on an automatic monthly step-up these days (retirement income choice rider).  As the client ages, you still have to manually call in the Guaranteed Withdrawal % rates (ages 59-69=5%, 70-79=6%, 80+=7%), but only if the policy value is above the withdrawal balance, but that's not too bad to monitor. 

I'll have to check out the PRU product. 
Oct 24, 2008 8:36 pm

Haven't used it but the Prudential Apex II with the Highest Daily Lifetime Seven (i.e. 7% growth factor) GMIB rider but it looks attractive. 

 
Guys, I'm a broken record on this.  Talking about a 7% GMIB is absolutely meaningless without understanding the annuitization factors.  Have you looked at the actual contract to see the annuitization factors?  They won't have this in any marketing material.  This information won't be in a prospectus.  Yet, it's absolutely critical.
Oct 24, 2008 9:53 pm

Anon, you bring a good point I forgot about (I'm not using the GMIB riders).

On some of these policies, if the policy value hits 0, that can mean the end of the rider.  And make sure you don't have to annuitize.  Someone has to read that damn prospectus, and you know it won't be the client. 

Oct 24, 2008 10:02 pm
anonymous:

Haven't used it but the Prudential Apex II with the Highest Daily Lifetime Seven (i.e. 7% growth factor) GMIB rider but it looks attractive. 

 
Guys, I'm a broken record on this.  Talking about a 7% GMIB is absolutely meaningless without understanding the annuitization factors.  Have you looked at the actual contract to see the annuitization factors?  They won't have this in any marketing material.  This information won't be in a prospectus.  Yet, it's absolutely critical.



Exactly.  Always read the prospectus prospectus and contract.  That's why I also wrote after my quoted statement above, "Downside is you cannot take withdrawals during 10-year accumulation period or the rider terminates"  because I had to pump this info out from the internal w/s.  It did not say this in the nice brochure you hand out to the client.

Oct 24, 2008 11:07 pm
anonymous:

Haven't used it but the Prudential Apex II with the Highest Daily Lifetime Seven (i.e. 7% growth factor) GMIB rider but it looks attractive. 

 
Guys, I'm a broken record on this.  Talking about a 7% GMIB is absolutely meaningless without understanding the annuitization factors.  Have you looked at the actual contract to see the annuitization factors?  They won't have this in any marketing material.  This information won't be in a prospectus.  Yet, it's absolutely critical.
 
For what it's worth, I don't use any GMIB.  I use a GMWB so no annuitization.  I think there is some confusion in some advisors' eyes about the differences between riders.
Oct 25, 2008 7:08 am
"For what it's worth, I don't use any GMIB.  I use a GMWB so no annuitization." 
 
That's wrong.  It's just that the amount that would be annuitized is the contract value.  You should still take the time to understand the guaranteed annuitization rates. 
 
The GMWB is an "income now" type of rider.  The problem is that VA's are not designed for "income now".  If someone starts drawing from a VA and the market goes down, the expenses of the VA make it very hard to recover.  Additionally, as the contract value decreases, the expense % actually increases.   In short, using a VA for "income now" means that there is a very good chance that all that the person is going to is the guarantees.
Oct 25, 2008 11:55 am

There are differences between GMWB and GLWB, see here:
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20080928/REG/309299964/1006

GMWBs usually only pay a benefit is the policy value is positive.  If, due to fees, market performance and draws, the account hits 0, the GMWB stops. 

GLWBs, the guaranteed lifetime withdrawal benefit, pays a benefit regardless of policy value, even if it hits 0. 

I've seen quite a few carriers mislabel their riders, so really, read the prospectus to make sure you know what you're getting. 



Oct 25, 2008 2:44 pm
gvf:

There are differences between GMWB and GLWB, see here:
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20080928/REG/309299964/1006

GMWBs usually only pay a benefit is the policy value is positive.  If, due to fees, market performance and draws, the account hits 0, the GMWB stops. 

GLWBs, the guaranteed lifetime withdrawal benefit, pays a benefit regardless of policy value, even if it hits 0. 

I've seen quite a few carriers mislabel their riders, so really, read the prospectus to make sure you know what you're getting. 



 
I have read the prospectus.
 
For what I use, it clearly states that the GMWB is in effect until the contract value hits zero (without excess withdrawal).  If you stay within the Maximum Annual Withdrawal (MAW) and the contract goes to 0, you are now in Lifetime Automatic Periodic Benefit Status, which means you get the full MAW amount annually until you die.  So there is no annuitization.  It is the same amount as you were collecting when the GMWB was in effect.