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Pacific Life GPA 5

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Apr 9, 2008 5:29 pm

Help me understand this rider.  I've spoken with the sales desk at Pac Life, but I am struggling to see the value to the client.  I see the value to Pac Life (25 bps annually), but the reality of them actually paying out something I think is nil. 

So, I understand that it is a rider that protects principle payments for 10 years.  If at the end of 10 years the contract is worth less than the payments, they'll kick in the difference.  GPA 5 has a step up at 5 years.  Then they will protect from there.    So, my client put in $73K in 2004.  Pac Life is guaranteeing that in 2014 his policy will be worth at least $73K or they'll kick in the difference.  Does the policy end then, or do they discontinue the rider and let the client move on from there.   But, let's say that in 2009 his policy is worth $100K.  Because they chose GPA 5, Pac Life steps up their protection to $100K.  If in 2019 the policy is worth $50K because the Dems have run this country into the ground, Pac Life will pay out $50K.  Is there a step up every 5 years until the client reaches a certain age or is it just a one time deal.   This rider seems like a waste of money to me.  Do any of you guys use this rider? 
Apr 9, 2008 5:36 pm

No.  What kind of stone age rider is that?

Apr 9, 2008 6:07 pm

“Help me understand this rider.  I’ve spoken with the sales desk at Pac Life, but I am struggling to see the value to the client.  I see the value to Pac Life (25 bps annually), but the reality of them actually paying out something I think is nil.”

  I don't know the particulars of this particular contract.  I can tell you that I often use something similar.   I use a 0% GMAB.   I'll use your example.    The client puts in $73,000 in 2004.  On the 10th anniversary, the contract will be worth the contract value or $73,000...whichever is more.  It is a one day guarantee.  This can also be reset every year.   Therefore, if the contract value is worth $100,000 in 2009 and the client chooses to reset it, the one day guarantee will be for $100,000 for the 10th anniversary of that step up in 2019.   I believe that a rider like this has tremendous value.  Whether it is going to pay or not is almost irrelevant.   Its value lies in how it positively impacts investor behavior.      Here's a simplistic example.  Let's take 3 identical investors who currently have their money in CD's.  Their risk tolerance indicates that they should be invested 20% equity and 80% bonds.   To achieve their goals, they need to get a 9% return.  What should they do?   If they invest according to their risk tolerance, they have virtually no chance to achieve their goal.   If they invest in 100% equities, they'll be fine if the market goes up, but we know that they won't be able to sleep and will probably sell when the market goes down and very possibly will be in worse shape because of this than if they just kept their money in CD's.   If they buy the VA with the 10 year GMAB, they can invest the money 100% in an aggressive manner.  When the market goes down, the guarantee will stop them from losing sleep and stop them from selling their investments.   In short, the .25% will lower the performance of the investment, but is VERY WORTHWHILE if it improves the performance of the investor.   The guarantees always look bad when it comes to investment performance, but often look good when it comes to investor performance.  We can't improve investment performance.  We can improve investor performance.
Apr 10, 2008 2:26 am

Total waste of time. People will complain in the 5th or 6th yr that they’re ROR is bad. You’ll reexplain the rider to them & get them to stay. A year later(or sooner) they’ll come back and have the same conversation. The guarantees don’t stop them from losing sleep, they just stop them from coming back to you to switch the $$ to another product in this case(because they know you’ll just try to convince them to stay). If you’re looking for a more honest guarantee of principal rider take a look at Nationwide’s.

I feel the same way about these remove all your assets over 15 yr riders. People don’t think in those length of times. Even if they did, if you needed to truly guarantee someone’s income for life, what does the person do after the 15th yr?

Apr 10, 2008 2:46 am

Ashland, my experience has been very different than yours.   I’ve sold a substantial amount and I don’t get complaints.   I had very happy clients for a while and now they aren’t as happy, but they are fine because they know that they can’t lose money.   

  Even if they were complaining and worrying some, if the guarantees get them to stay invested, the guarantees are still beneficial.   I'm with you in that I have a problem with many of the guarantees.  That being said, how can any guarantee be "more honest" than a 0% GMAB?
Apr 10, 2008 2:21 pm

Anon -

It may not be the guarantees that make them stick, it may be you. You’re pretty darn good at this, and your relationships w/ them may be strong enough & the conviction in your voice sincere enough that they move along. I’m not quite as convinced of the efficacy of this guarantee as you are.

Apr 10, 2008 2:27 pm

I’m not quite as convinced of the efficacy of this guarantee as you are.

  That probably is the difference.  Our clients feel our conviction.  None of us should be selling anything when we aren't convinced that it is best for our client.  The good thing is that are always multiple solutions and there is no reason why we need to agree on what is best.
Apr 18, 2008 4:28 pm

From a rational point of view, this is a worthless rider. 

  But how many of your clients are rational when their $500,000 VA has dropped to $250,000?   Anon is spot on as to the value.  I don't use the rider, but talk about the death benefit in the same way.  The WORST thing that can happen if you sit on your hands is that your kids will get 100% of what you paid in.