Newfangled Annuities Offer Benefits, Hold Risks
|By Alan Lavine|
|Penton Business Media|
If volatile markets are driving your clients to consider locking in lifetime income through a variable annuity guaranteed lifetime withdrawal benefit, deals soon could improve.
New on the horizon: Contingent annuities. These programs, if navigated carefully, not only could slash the high cost of variable annuities, but also offer more favorable tax treatment for high-tax-bracket investors. You wouldn’t need to transfer clients’ assets to an insurance company. Instead, an investment manager can manage the money, paying the insurance company exclusively for the insurance that guarantees a client’s lifetime periodic income.
Contingent annuities, so far, lack the death benefit typical of variable annuities. When a policyholder dies, variable annuities often are guaranteed to pay the beneficiary the investment’s market value or the original principal, whichever is greater.
Contingent annuities also lack another major benefit of variable annuities: Tax deferral of contributions. Nevertheless, upon taking distribution, those in higher tax brackets could save big bucks—at least until assets are depleted and the insurance guarantee kicks in. Rather than paying the ordinary income tax rate—as much as 35 percent—on a portion of your annuity’s distributed income that represents earnings, you’d pay tax at today’s lower 15 percent capital gains rate. Once the insurance guarantee kicks in, though, ordinary income tax may be owed on a portion of your payments.
Beware that tax treatment, not to mention current tax laws, could change.
Right now, this stand-alone guarantee is only believed to be widely available from money managers through
But if this interests you, keep your eyes peeled. The contingent annuity could become available directly to the public later this year, says
The contingent annuity is designed for pre-retirees seeking to protect assets before they retire and retirees seeking to control assets, yet generate income from them, Stone says.
While it could be expensive to work with a money manager, Stone suggests that clients can save around half the cost of a traditional variable annuity if they shop around and select low-expense fund offerings. “Not every adviser charges 1 percent (for assets under management)” he adds. “Some charge an hourly fee and some charge a flat fee.”
It could be wise to wait and see what happens with this type of insurance protection. The
Some insurance companies, like
In fact, Fitch Ratings,
Insurance regulators are hotly debating contingent annuity issues, says
But Meyer stops short of recommending that investors hold off purchasing a variable annuity and wait for more attractive contingent annuity offerings to come down the pike.
“Maybe it’s all about choice,” Meyer says. “This sort of new offering provides greater choice for the consumer.”
Although Vanguard mutual funds are included in the Aria Retirement Solutions offering, the low-fee mutual fund and exchange traded fund provider has questions about contingent annuities. Vanguard might offer it at some point, according to
Vanguard already offers one of the industry’s lowest-cost variable annuities to investors, he says. Including mutual funds, expenses average about 0.59 percent. That, he says, includes a limited death benefit, lacking downside protection, but guaranteed to pay the accumulated market value to the policyholder’s beneficiary if the policyholder dies. If you choose to add a guaranteed lifetime withdrawal benefit to lock in periodic income, you pay another 0.95 percent.
A lot of insurance companies, he says, “are on the sidelines looking at this very closely with the idea of entering the market…”
“What happens in the annuity business is everybody is trying to be one step in front of their competitor,” he says. “As years have elapsed, benefits increase and decrease depending on the profitability of companies. Every benefit you get costs money.”
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