Until recently, pre-retirees desiring high investment yields and the assurance of a lifetime income invariably looked to variable annuities (VA) offering guaranteed living benefits. This no longer holds true.
Today, as I note in my feature, Reversal of fortunes, a growing numbers of aging baby boomers are favoring instead fixed indexed annuities — and for good reason. Though they don’t match the VA’s potential for market gains, FIAs outclass VAs in two key respects, both of which hinge of the products’ superior GLBs: (1) product flexibility; and (2) the ability to assure an income stream that can sustain clients throughout their retirement years.
Tim Barton, principal of Future Financial Images, Pepin, Wis., agrees, adding that the FIA’s ability to offer clients a choice between principal and indexed earnings is especially relevant in light of a key market statistic: 98 percent of annuities are never annuitized. The alternative offered by variable annuities, forgoing access to principal to secure the income benefit is tantamount, says Barton, to a “legal divorce” from one’s money.”
Doug Wolff, president of Security Benefit Life, Topeka, Kan., observes also that VAs with GLB riders must hedge against two risks: (1) outliving one’s income and (2) equity market volatility. Fixed indexed annuities, while hedging against longevity risk, correlate less than VAs with equity market values, thus reducing the cost of hedging. The result is greater product flexibility — and more appealing riders.