Monday, May 23, 2005

Speaking of Variable Annuities

Here's an article where I was quoted. I would like to clarify what I meant here. Please read this first. It comes from

Retirement Needs Spur New VA Products Article published on May 20, 2005 By Alison Sahoo
-->A growing number of variable annuity providers are introducing products and programs to help soon-to-retire baby boomers convert investments into income that will replace wage earnings.
New offerings include VAs with guaranteed minimum withdrawal benefits (GMWBs) for life and VAs marketed to holders of individual retirement accounts (IRAs).
Earlier this month, John Hancock enhanced its Principal Plus GMWB option for its Venture family of variable annuities, raising the guarantee period from five years to effectively cover older contract holders’ entire lifetime.
GMWBs protect investors against market volatility by allowing them to make systematic withdrawals from a protected value for a certain period of time.
Hancock’s move, says Manulife Wood Logan president Robert Cassato, was designed to expand upon the product’s strong sales momentum. Manulife Wood Logan provides sales and marketing support for John Hancock’s investment products.
Principal Plus was introduced in late 2003. In 2004, says Cassato, sales jumped 47% from the prior year and the rider was included in 50% of total sales. Now, the rider is included in about 80% of new sales.
The new lifetime benefit allows clients to withdraw up to 5% of their initial payment each year for 20 years regardless of market performance. It also guarantees payments for the life of contract owners who are 65 or older.
That gives retirees a steady stream of income and is especially important, Cassato notes, since less than 1% of all contract holders now convert their VAs into payment streams through annuitization.
The vast majority, he says, never realize the products’ intended benefit of receiving regular payments from their investment because they’re afraid that by annuitizing, they’ll give up their ability to access their full holdings should they need them.
“We’re so excited about this,” he says. “This comes at a time when baby boomers are looking to convert their nest egg into a pension and makes VAs the product of choice for the retiring generation.”
Principal Plus is priced at 30 basis points and the new Principal Plus for Life costs 40 basis points. Cassato says he expects most new business to shift to the enhanced option.
GMWBs were pioneered by Hartford in mid-2002, when the company launched its Principal First benefit. The rider allows contract holders to withdraw 7% of their investment principal each year until it’s exhausted. That usually takes 10 or 12 years and investors pay 50 basis points each year for it.
Last year, Hartford expanded its offering with Principal First Preferred. It allows investors to withdraw 5% each year, so payments are spread over a longer period of time. It costs 20 basis points.
Neither, however, guarantees payouts for the life of the contract holder.
Hartford vice president for annuity product development Rob Arena says that the company is focused on designing investment and income products to help retirees both accumulate assets and generate an income stream that will last their lifetime.
“With our variable annuity products, we are helping investors meet these needs by offering a broad range of asset allocation solutions to address their changing investment objectives and living benefits such as GMWBs for retirement income planning,” he says.
The company recently expanded its Director M variable annuity, adding six new investment managers and three new mutual funds.
Despite the growing popularity of GMWBs, however, some say that consumers should still be cautious because the products are complicated.
“The problem is the way that brokers and agents describe the guarantee,” says Tony Bahu, CEO of and author of Annuities: The Shocking Truths Revealed. “Most of the time, the agent doesn’t explain it properly, so people aren’t aware of how they work. Investors should also do their own homework.”
Other VA providers are focusing on encouraging investors to use their products as an investment vehicle for their retirement accounts.
MassMutual, for example, has just launched a new campaign to help financial pros pitch VAs for retirement account rollovers.
Although the ability to defer income tax on gains from VAs duplicates that feature of qualified retirement plans, VAs offer some other benefits that can be very attractive.
Those include income benefits like the GMWB and death benefits that will protect the value of VAs from market declines for contract holders’ heirs. When the customer dies, heirs can receive the higher of the original principal paid in or the contract value on its highest anniversary, depending upon the option selected.
A spokesman for MassMutual could not provide further detail by press time.
According to the National Association for Variable Annuities (NAVA), net flows into VAs were $8.2 billion in the fourth quarter of last year, a 37.9% decrease from a year ago. That includes customer withdrawals and transfers. At the end of the quarter, there was $1.1 trillion in assets held in VAs. This represents a 7.2% drop from the end of 2003.

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Yes, these living benefits are very tricky, and sometimes deceiving. I also believe they are explained so poorly by agents and the industry and that is what makes them so deceiving. Once again, I am not inherently against them (nor for them) but because I have seen so many people get burned by them, I am very leary.

Let me explain. Many people are never told that if the 'iving benefit' comes into play, in most annuities, there are strings attached. This means that there are limitations over how you can take your money. With that said, it comes back to haunt the client later.

Furthermore, the living benefit has a price to it. Factor that in with the cost of variable annuities, and you have yourself one expensive investment vehicle. If the market averages 9% over time and your expenses are over 3% and your living benefit guarantees you 6% return, do you see where that becomes a problem?

There is much more to it but I will get into it in the near future in more detail. Thanks for listenting.

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