Insurance Q&A

April 19, 2013

An annuity with boomers in mind

Filed under: Annuities,Indexed products — rrroark @ 2:30 pm

For much of the past decade, variable annuities were “destination” products for clients’ retirement-oriented dollars, and with good reason. Variable annuities gave the vast baby boomer generation, then pre-retirees, market-linked accumulation potential, provided generous lifetime riders that limited downside risk through guaranteed benefits, and maintained liquidity.

The variable annuity benefit capability, however, is altered today as a result of volatile equity-market conditions combined with the historically low interest rate environment. In the face of skyrocketing costs for hedging, various firms have exited the variable annuity business altogether. Remaining competitors generally have scaled back (and/or increased the price of) the lifetime guarantees offered in their variable products.

For more coverage from our 2013 boomer survey, visit http://www.LifeHealthPro.com/BoomerSurvey.

With more modest and expensive lifetime income guarantees, many variable annuities have moved closer to their originally intended purpose of providing powerful tools for accumulating retirement assets. Importantly for advisors and clients, this repositioning of variable annuities has paved the way for a more rational, financially responsible spectrum of annuities in which the roles played by different products are more clearly delineated and more easily matched to the client’s stage of life.

The contemporary annuity continuum

Variable annuities — which pair income guarantees, liquidity and potential for asset growth with the possibility of market-induced downside risk protection — anchor the more aggressive end of the guaranteed retirement income spectrum. At the opposite end are deferred income annuities (DIAs) and single-premium immediate annuities (SPIAs), characterized by strong income guarantees and stable account values but little or no liquidity and no market-related growth potential. The former clearly have a place for clients still in the retirement-accumulation phase of life, and the latter should appeal to the more risk-averse clients and those squarely in the decumulation phase who seek income they cannot outlive.

Neither, however, may be desirable to many boomer clients, given their stage of life and the present macro environment. With portfolios battered by, and barely recovering from, two stock market crashes in less than a decade, boomers in or approaching the early years of retirement continue to need income growth potential yet cannot afford to sacrifice principal protection for growth. This need for growth, combined with the relative illiquidity of income annuities, may make DIAs and SPIAs a difficult sell to boomers. Variable annuities, however, may be too volatile for these clients and provide too little guaranteed income.

The rest at An annuity with boomers in mind | LifeHealthPro.

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