Annuity Riders

If you're shopping for a variable annuity, you might want to wait till May

Wed, 30 Mar 2011 13:19:00 -0400

Here we go again. Several insurers are poised to enhance their variable annuity product offerings in their May filings with the SEC. This list includes: Transamerica, Lincoln, John Hancock, and Metlife.

But as opposed to the 2007 “Arms Race” where insurers competed on generous features, with less caution for a doomsday scenario (e.g. 2008), these products will be a combination of innovation while factoring in the lessons learned - a smarter bread of variable annuities.

For example, I expect these products to limit the damage that can be done to a policyholder’s account value in a bad scenario, hence limiting the amount of claims that the insurer will pay out to cover the difference. This in turn reduces the rider fee charged to the policyholder.

There’s a number of ways this can be done and I expect to see several variations:

Charging a rider fee based on the portfolio allocation to equities vs bonds. For example, a portfolio with 60% in equities would be cheaper than a portfolio with 70% equities. The good: choice for the consumer - you pay for what you want & need. Also, a bit more transparent than other options. The bad: This approach is more risky for the insurer, as they are more concerned with the fund’s volatility than just equity allocation.
Dynamic Asset allocation: Prudential has been successful with this approach, and I wouldn’t be surprised to see more companies offering something similar. With this technique, you have an asset allocation when the market is calm: say 70% equity / 30% bonds. But when the market starts heading south, your allocation becomes more conservative in an attempt to weather the storm. So in a 2008 scenario, your allocation may reduce to 30% equity and the rest bonds. The good: you expect to lose less money in down markets than staying in equities. The bad: you may miss out on some of the gains when the market turns around because this strategy reacts to the market. Also less control to the investor.
Adding derivatives inside a fund. This fairly new technique is meant to limit the volatility inside the fund itself. Instead of investing in say the S&P500 index, this type of fund holds, a combination of the index and short futures or option positions. I won’t go into further detail here, but the idea is that when markets go down, the derivatives offset some of the losses. But when the market goes up, the the derivatives (or fees) offset some of the gains. So the net result to the the investor is less volatility in returns, which means both your gains and losses will be reduced. The good: allows for a cheaper rider. The bad: limits the upside and less transparency.

By utilizing one of these strategies, insurers will be able to either reduce the cost of the guarantee or enhance some of the features. At a macro level, insurers will have a better handle on the risk they are taking, which means stronger financial strength.

If you’re considering a variable annuity, it’s worth waiting until May to get a look at these new products. And be sure to take a look at their financial strength (I recommend Weiss). I would also consider diversifying your investment to more than one annuity company.

Check out my new site: www.NoBullAnnuities.com

Wed, 23 Mar 2011 12:21:14 -0400

I’ve created www.NoBullAnnuities.com/ as a free, unbiased resource to help consumer do their homework when considering a variable annuity.

On the site you’ll find interactive tools that allow you to visually compare annuities. We’re currently looking for volunteers to test it out before it is released to the masses. If you’re interested, please sign up at www.NoBullAnnuities.com/ .

If you have any suggestions or ideas for the site, please let me know! You can contact me by clicking on the “email me” link in the left menu column.

Thanks!

Ryan

The VA industry is becoming increasingly top heavy. As...

Wed, 17 Nov 2010 13:08:16 -0500

The VA industry is becoming increasingly top heavy. As discussed in this WSJ article, the top 4 variable annuity players now make up 48% of the 2010 industry sales!

Consumers would be best served with healthy competition and a wider dispersion of market share. If nothing else, advisors should be thinking about not putting all their consumers’ eggs in one basket, but rather spread their annuity investment among several companies - including a mutual company (which traditionally have the highest ratings in terms of financial strength).

I also think that more work needs to be done in fitting the annuity with the purchaser. Not every investor needs the richer (& more expensive) features if they are not going to use them. But I have a bad feeling that commissions are driving these decisions more than anything else.

Fingers crossed on a more competitive annuity landscape in Q4 & 2011.

The Wall Street Journal had an in interesting article regarding...

Tue, 26 Oct 2010 12:23:41 -0400

The Wall Street Journal had an in interesting article regarding the (lack of) inflation adjustment for social security (here).

In the article, they reiterate a common feeling that measuring inflation is a “clumsy practice.”

“We have to use these average weights” in the consumer-price index, says Ken Stewart, an economist at the Bureau of Labor Statistics. “If you spend more on medical care, tobacco, college tuition — these are items that over the past 25 years have gone up faster on average than other items. If you’re spending more money on consumer electronics and TVs and things that have fallen in price, you may not see any inflation out there.”

The key takeaway here is that having retirement income linked to inflation is just not as safe as people may write if off to be. If one’s personal consumption differ’s widely from the generic basket, then the inflation realized by the individual will be widely different. Now this could be a good or bad thing depending on if one is buying more electronics or more medications. But I’m guessing more retirees are in the same boat as the person who left these comments :

“Just found out the the co-pay on my name brand medications will rise 792% next year. No COLA (cost of living adjustment)? BS.”

Some 401(k) Plans Are Adding an Annuity Option

Thu, 16 Sep 2010 14:49:52 -0400

Some 401(k) Plans Are Adding an Annuity Option:

In light of the Dept of Labor & Treasury talks with annuity industry, the linked article explains some of the approaches insurance providers are offering annuities inside 401(k)’s.

Vanguard Introduces Online Annuity Service

Sun, 12 Sep 2010 15:00:50 -0400

The Vanguard Annuity Access platform will offer their customers the ability to shop and compare immediate and fixed deferred annuities from multiple careers online for a 2% upfront fee.

This is great news for web savvy boomers who are looking to purchase fixed annuities online.

Most Investors Clueless on Annuity Guarantees

Thu, 09 Sep 2010 11:47:00 -0400

Most Investors Clueless on Annuity Guarantees:

According to this study by Allianz, only 27% of those surveyed know about variable annuity innovations made in the last 10 years. Rather, they base their view on research that was done 10 - 20 years ago. Scary!

There is much education that needs to be done to help the american public make informed decisions on meeting their retirement needs.

Dr Zvi Bodie gives 3 tips for a comfortable retirement.

Wed, 08 Sep 2010 11:16:00 -0400

Dr Zvi Bodie gives 3 tips for a comfortable retirement.

On the lighter side… actuarial fashion. source: flickr

Tue, 31 Aug 2010 23:04:00 -0400

On the lighter side… actuarial fashion.

source: flickr

David Babbel & His "Controversial" Annuity Study

Fri, 20 Aug 2010 00:15:00 -0400

The Wall Street Journal recently published an article entitled: “Beware of ‘Independent’ Investing Research”. In the article it discusses a study on annuities that was performed by University of Pennsylvania’s Wharton School, led by David Babbel. The controversial title of the WSJ articles stems from the fact that the study was co-sponsored by New York Life.

For anyone looking to read the study it can be found here:

Investing Your Lump Sum at Retirement, David F. Babbel and Craig B. Merrill, August 2007 (11 pages)

which was based off of:

Rational Decumulation, David F. Babbel and Craig B. Merrill, May 2007 (36 pages).

Both were co-sponsored by the Wharton Financial Institutions Center and New York Life Insurance company.

I would like to think that professors at our most prestigious universities have higher ethics than those on Wall Street, but I can understand those who believe their is a conflict of interest. However at the end of the day, I think this nets a positive for society to have our top academic minds studying the retirement issues that many baby boomers face. But please, read the study for yourself. Read the assumptions and reach your own conclusion on the validity of his findings.

A ranking of variable annuity providers who have the best...

Wed, 18 Aug 2010 10:54:07 -0400

A ranking of variable annuity providers who have the best branding.

Source: Cogent Research’s 2010 Advisor Brandscape(TM) report

I have a Lincoln Financial Group variable annuity which was purchased with the help of a reputable fee-based advisor. I have owned this annuity for about one year. I am 61years of age, retired, and also have pension. What are your thoughts in regards to this particular company?

Tue, 17 Aug 2010 14:15:00 -0400

One of the most important aspects when choosing an annuity is the financial strength of the issuing company. The following link provides Lincoln Financial Group’s financial strength ratings by the traditional rating agencies as of July 28, 2010: link

Company strength is the only real generalization that can be made about a specific annuity provider. When trying to answer questions like: “What is the most suitable product for me?” The answer will be unique for each investor and will depend on a number of factors including their goals, preferences, and risk tolerance. Annuity Riders is collaborating on a platform to help individuals understand the value proposition of annuities. Send me an email (ryan.hinchey AT annuityriders DOT com) if you would like to receive future announcements on this project.

Please note that I am not a financial advisor. I do not endorse any annuity providers.

Variable annuity sales finally showed meaningful signs of...

Tue, 17 Aug 2010 03:05:00 -0400

Variable annuity sales finally showed meaningful signs of improvement in Q2. Looks like consumer confidence in VA’s are on the rise. Source: Limra

This graph illustrates the yield a 65 year old would receive...

Thu, 12 Aug 2010 11:44:48 -0400

This graph illustrates the yield a 65 year old would receive when investing in a Single Premium Immediate Annuity (SPIA) with a 10 year guarantee period. Since the product pays out for as long as the individual is alive, the yield increases as the individual lives to an older age.

"As income taxes go up and personal exemptions are phased out, the ability to defer income taxes..."

Wed, 11 Aug 2010 11:03:02 -0400

““As income taxes go up and personal exemptions are phased out, the ability to defer income taxes becomes more valuable. And with annuities, you don’t have to tax investment gains until you start taking payments.””

- - Moshe Milevsky, from the article “An Annuity: What No Well-Heeled Client Can Do Without,” by Warren S. Hersch

Allocation to Deferred Variable Annuities with GMWB for Life

Mon, 09 Aug 2010 13:39:01 -0400

Allocation to Deferred Variable Annuities with GMWB for Life:

The value proposition of a Guaranteed Lifetime Withdrawal Benefit (GLWB) is dynamic in nature; it depends upon the interaction of the preferences, behaviors, and demographics of the policyholder. As such, there is no one size fits all answer to questions like “How much of my portfolio should I allocate to a variable annuity with a GLWB?”

In this study, Ibbotson analyzes how the different factors affect the recommended outcome for the above question. Here are some of their high level findings (spoiler alert):

low risk tolerance = higher GLWB allocation
higher age (above 65) = lower GLWB allocation
above average health / life expectancy = higher GLWB allocation
higher wealth & low need for guaranteed income after factoring in DB plans & social security = lower GLWB allocation
bequest motive (desire to leave an inheritance to heirs) has no material impact.

While the findings may seem intuitive, more interesting is the degree to which recommendations can vary, depending on the policyholder.

Behavioral Economics and Retirement Investing

Mon, 02 Aug 2010 11:46:00 -0400

Behavioral Economics and Retirement Investing:

PIMCO’s recent study examines how framing retirement solutions reflects their perceived value by consumers.

Framing a retirement product as an “income solution” rather than investment returns is more appealing, as it comes across as a stable form of retirement consumption that aligns with their perceived expenses. However, most retirees typically don’t think about inflation as a threat (known as “money illusion”). But, when this risk is explained to them properly, they have a preference to inflation adjusted contracts.

It would seem to me that ALL investment returns and income payouts used to illustrate retirement products/investments should show inflation adjusted figures to help customers understand the real value of the contract.

"Many fee-based advisors continue to shun annuities, finding them too complex or too costly. Many..."

Thu, 29 Jul 2010 11:58:33 -0400

“Many fee-based advisors continue to shun annuities, finding them too complex or too costly. Many consumers, no doubt, feel the same. The industry must still contend with what many have dubbed the “annuity puzzle,” or the lack of popularity of annuities despite the economic arguments in their favor.”

- Excerpt from the article: “Annuities From Bust to Boom” by Paul Menchaca

" “Maintaining income that meets your needs” topped the list when we asked retirement-age investors..."

Tue, 27 Jul 2010 10:38:00 -0400

“” “Maintaining income that meets your needs” topped the list when we asked retirement-age investors what retirement topics they most want to learn about in 2010 (cited by 44%). Closely following was “not outliving your assets” (37%).”

- Frank M. Porcelli, Investment News

Photo

Mon, 26 Jul 2010 11:19:34 -0400