What are the possibilities that your clients will use their annuities for purposes other than what you discussed at point-of-sale? This question should be of particular interest to agents who sell their clients only variable annuities (VAs). If I had a dollar for every time a “VA agent” asked, “Why should I sell indexed annuities, when I can sell my clients VAs with living benefit riders?,” I’d be a rich, rich woman.
Indexed annuities (IAs) are “safe money products,” where the purchaser can never lose money due to market fluctuation. Indexed annuities’ potential for gains is limited, but they have rich guarantees: death benefits, cash values, an income that cannot be outlived, and more‑all without an annual fee.
Variable annuities are “risk money products,” where the purchaser can lose not only their gains, but also their original investment. On the other hand, the potential for gains is unlimited with VAs. This type of annuity has the potential to lose the death benefit, liquidity features and guaranteed lifetime income should the value of the contract be depleted. In order to have guarantees in a VA, you must pay an annual fee for one or more optional living or death benefit riders. For example, using a rider such as a Guaranteed Lifetime Withdrawal Benefit (GLWB) can hedge against some of the risks associated with a VA, i.e., a GLWB guarantees the purchaser that the lifetime income stream they receive will never drop below a specified level.
My perspective? A VA with a living or death benefit rider is just an attempt at emulating an IA. Yet, it is more dangerous because it can lose value. However, there are hundreds of agents that have the mentality, “Why sell the IA, when I can offer my clients all of the market’s upside and protect them from risks at the same time? An IAs’ gains are limited.”
Seriously? A VA can lose value, even if you don’t take a withdrawal. An IA cannot. Sure, the GLWB offers a minimum lifetime income stream, but you can get this on an indexed annuity for free. Sell me a VA when I’ve told you that I am “not comfortable losing money,” and I’ll file complaints with the insurance division, FINRA and the SEC‑just to name a few. Not to mention that I’ll write an article about it, and tell your momma too.
Want to avoid this with your clients? Pause before suggesting a VA with a living or death benefit rider if a prospect tells you that they are risk averse. Although the plan may be to use the annuity purely for an income stream at point-of-sale, you don’t want to deal with complaints should plans change and your client needs to cash surrender the annuity.