Certain annuities gain favor with boomers
After weathering a turbulent three years, variable and fixed index annuities with guaranteed lifetime withdrawal benefits have gained traction — for now.
From the third quarter of 2017 to the fourth quarter of 2018, retail sales of these riders in VAs and FIAs rose by 24%, according to Teddy Panaitisor, a research analyst at LIMRA Secure Retirement Institute. That was a welcome rebound from the prior three years, during which such sales fell by more than 42%
“The primary reasons for the 2014-2017 drop were record low interest rates, which affected payouts, and uncertainty about the impact of regulatory issues,” Panaitisor says. Many advisors didn’t know how the imposition of a federal fiduciary rule would affect annuities with GLWBs.
What a difference a year makes. By the end of last year, interest rates — and yields to investors — had moved northward and the regulatory outlook had cleared somewhat. That served to revive GLWB sales.
“We see recent momentum continuing,” Panaitisor says. “Baby boomers are entering and going through retirement. No other product can offer the features — and the peace of mind — that a GLWB may provide.” Even during 2017, retail sales of VAs and FIAs with GLWB riders reached nearly $60 billion, indicating sturdy appeal to CFPs and their clients.
“No other product can offer the features — and the peace of mind — that a GLWB may provide,” says Teddy Panaitisor, research analyst at LIMRA Secure Retirement Institute.
Too much choice?
Traditional, immediate annuities discourage many seniors because they have a reputation for being too rigid and for exposing investors to risk of a short lifetime payout.
Enter the GLWB, which typically rides on top of a VA or a FIA and can confer upside from equity or equity-linked participation. Investors have control over — and access to — the money they’ve advanced, say GLWB boosters. There may be a death benefit for loved ones, and the insurer still promises ongoing cash flow no matter how many years the annuitant collects
But annuity naysayers maintain a GLWB rider has inherent flaws — namely, numerous and complex high fees. Moreover, they say the taxation of deferred annuities held in a taxable account can be harsher than taxation of immediate annuities. (Many types of annuities draw fire if held in a tax-favored retirement account where the tax deferral offered by annuities becomes redundant.)
Of these caveats, the biggest could be GLWBs’ innate complexity. A VA or an FIA on its own may be challenging to evaluate, select and explain to clients. Lay on a rider with a different internal — and inaccessible — account on which the guaranteed withdrawals are based, and the task of choosing a desirable annuity with a GLWB can indeed be daunting.
Among advisors who recommend GLWBs to clients, certain provisions draw praise.
“I look for a GLWB that allows the income to increase with inflation during the payout period,” says David Gaylor, president of Tradewinds Financial Group in Sidney, Ohio.
“Also, I want that provision to continue during the period when only mortality credits are being received, meaning the entire amount of the premium the client has paid has been received as income.” Gaylor adds that he won’t use one that doesn’t include this provision.
John Scheil, CEO of Cardinal Advisors, in Durham, North Carolina, owns FIAs with GLWBs personally, and recommends them to clients.
“Most GLWBs I write have a guaranteed step-up in the benefit base each year that someone waits to start income,” he says. “The income, once started, is guaranteed for life, and the annual income is doubled for up to five years if long-term care is needed.”
Scheil’s clients often use annuities with GLWBs as a proxy for a fixed-income allocation. Cash flow compares favorably with bonds, he points out. Also, clients can minimize interest rate risk, and married clients can each receive a lifelong payout.
Ben Barzideh, wealth advisor at Piershale Financial Group in Barrington, Illinois, prefers VAs with a GLWB that includes guaranteed income for the duration of both spouses’ lives.
“Some GLWB riders guarantee lifetime income only for the duration of one spouse’s life while others have a joint and survivor payout option,” he says. “We like GLWB riders that allow for spousal continuation of the rider values if one spouse passes away.”
For example, ifa husband dies holding a VA with a GLWB rider. the widow will be able to continue receiving higher income payouts as long as the account value of the VA contract was much lower than the guaranteed income base.
Indeed, Gaylor has found a “major red flag” in GLWBs that call for a benefit reduction once the annuitant or spouse’s premium has been exhausted. When a VA owner came in for a consultation recently, a conversation with the insurance company revealed that the annual benefit would go from $26,000 to $11,000 once the amount of money contributed by the client had been paid out by the insurer.
“I don’t know why anyone would utilize a product that would allow this to occur,” says Gaylor.
Another downside of a GLWB is its first-in, first-out nature, notes Scheil, “Once someone turns on the income and/or the long-term care benefit,” he says, “the company is just giving that person’s money back. It’s only if people outlive their cash value that they can get into the insurance company’s money.”
Therefore, any type of lifelong annuity arrangement should be viewed as longevity hedging with an eye toward protecting clients from financial distress in old age.
With a properly designed GLWB, a deferred annuity such as a VA or an FIA may become a virtual annuity without having to annuitize the contract and sacrifice flexibility. Interested financial planners should understand how a GLWB will function, even after death or disability, and make sure clients know what’s really guaranteed.