Kitces | Nerd's Eye View - Annuities

Strategies For Existing Variable Annuities With GLWB Or GMIB Riders

nospam@example.com (Michael Kitces) — Wed, 10 Apr 2013 06:03:00 -0500

While some advisors recommend annuities more often than others, virtually any advisor may have to deal with situations where clients have existing annuities. And because of the significant "living" and death benefit riders offered over the past decade, the reality is that the decision about what to do with an existing variable annuity is not as clear cut as it was in the past; in fact, failing to do proper due diligence before recommending a client cancel a variable annuity can land an advisor in more hot water than just selling one in the first place!

Unfortunately, the due diligence process is complicated by the fact that almost no two variable annuity riders work the same, with a broad range of GLWB and GMIB riders from one company to the next, each with their own unique features and benefits. As a result, there's more pressure than ever on advisors to read through the details of each and every contract, to try to make a good assessment of the situation and what the client should do next. On the plus side, though, a growing number of third-party providers are available to assist - including a notable new offering aptly titled "Annuity Review" - giving advisors the opportunity to gain outside expertise to help go through the details of contracts with which they may not be familiar.

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Is Variable Annuity Tax Deferral Worth Paying For Again?

nospam@example.com (Michael Kitces) — Wed, 13 Feb 2013 06:02:00 -0600

Through the 1980s and 90s when tax rates were higher, variable annuities were a popular tool for tax deferral. However, since the late 1990s, the primary focus of the annuity industry has been on risk management instead, offering a series of living and death benefit features that have provided significant guarantees, but at a significant cost. When combined with tax rates that declined significantly with President Bush’s tax legislation in 2001 and 2003, the benefit of tax deferral associated with non-qualified annuities was simply no longer worth the cost.

In a significant shift, though, an emerging new generation of low cost variable annuities, combined with a significantly more progressive tax system since the American Taxpayer Relief Act of 2012, may usher in a new era for the use of variable annuities, especially when the contracts can be used strategically as an asset location vehicle to shelter high-return but tax-inefficient investments. Consequently, while not long ago it was projected to take a decade or two for the benefits of tax deferral to offset the cost, it now can take as little as a year or two for higher income clients! The end result: it may once again be time to seriously consider the cost of variable annuities as an expense worth paying to harness the value of tax deferral.

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The Emerging Next Generation Of Variable Annuities - An Asset Location Tool?

nospam@example.com (Michael Kitces) — Wed, 12 Dec 2012 06:06:00 -0600

For the past 40 years, variable annuities have been on a rollercoaster, where the popularity of various features and benefits rise and fall as the contracts shift and adapt to the then-current environment. In the early years, variable annuities were popular for tax-deferred investing as top tax rates of the time were 70%, and remained popular in subsequent years as the burgeoning bull market made equity investing more appealing overall, even as tax rates declined. As the 2000s approached, variable annuity companies innovated, creating a wave of so-called "living benefit" riders that included GMIBs and GMWBs, to make variable annuities appealing to the coming onslaught of baby boomer retirees. Unfortunately, though, with the financial crisis, living benefit riders became far less appealing - old contracts forced annuity companies to raise reserves, and new contracts experienced a significant cost increase as annuity companies struggled to hedge and manage risk in a more volatile post-crisis environment.

As a result, annuity companies are now entering a new wave of innovation - where variable annuities are bolstered by more innovate active management and alternative investment strategies, and the annuity itself is used as a tax shelter for these rather tax-inefficient investments, at a drastically lower cost than the annuities of recent years. Whether this new line of variable annuities will catch on remains to be seen, but the potential is for variable annuities to become a major part of portfolio design in the future - where the variable annuity becomes an asset location tool and clients can voluntarily choose how much of their most tax-inefficient investments will be sheltered by tax deferral.

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Variable Annuity Guarantees May Be Too Risky Or Too Expensive, But They Can’t Be Both!

nospam@example.com (Michael Kitces) — Wed, 27 Jun 2012 06:09:00 -0500

The variable annuity industry has a long history of criticism, generally stemming from the relatively high cost of their guarantees relative to less expensive investment alternatives. To burnish their value, in the past 15 years variable annuities have stepped up the guarantees that they provide, delivering a far wider range of income and death benefit features. However, in the face of wild market fluctuations – especially the 2008 financial crisis – many critics now also point out that the new guarantees of variable annuities pose new risks about whether the company will even be able to make good on its guarantees when the time comes. Yet the reality is that suggesting that variable annuities are risky and that the companies might not be able to pay on their guarantees would suggest that they’re not charging enough – implying that actually, variable annuities are too cheap, not too expensive! Alternatively, if the reality is that the current world of variable annuity guarantees really are too expensive, then there should be no risk at all, as the companies would have more than enough excess profits to handle the risks. So which is it at the end of the day? Are annuities really too expensive, or are they actually too cheap?
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Are Annuities Really Expensive, Or Could They Actually A Cheaper Option? (Guest Post)

nospam@example.com (Michael Kitces) — Wed, 15 Jun 2011 07:43:00 -0500

There is way too much dogma surrounding annuity commissions. The commission argument against annuities is most often posed by registered reps, or investment advisor reps who stand to gain by keeping money out of annuities. In the spirit of fairness, I compared the commissions for annuities in general against the fees that would be earned by an advisor charging an AUM fee and came to a simple conclusion: the "annuities are bad because they pay high commission" argument simply needs to be retired.

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If Immediate Annuities Are Such A Great Solution, Why Doesn't Anyone Want To Buy One?

nospam@example.com (Michael Kitces) — Wed, 02 Feb 2011 10:16:45 -0600

In theory, it seems like such a great idea. The greatest fear of a retiree is living longer than expected and/or outliving his/her money. Only slightly less worrisome is the similar risk that the retiree lives so long that inflation erodes wealth and income to the point that the retiree can't maintain his/her standard of living. Yet there is a single financial services product that tackles these two fears head-on, with rock-solid guarantees (at least as long as you buy from a strong company): the inflation-adjusted immediate annuity. Or for those who are a little older with a shorter time horizon (where inflation is less of an issue), the even-more-widely-available traditional immediate annuity. But despite the apparent "perfection" of the solution to address the problem, immediate annuities are just a tiny fraction of overall annuity sales, and most clients are completely unwilling to put any money into them. So what's the deal? If immediate annuities are such a great solution, why doesn't anyone want to buy one?

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IRS (Unintentionally?) Reopens the Door to Annuity Partial Exchange Strategy

nospam@example.com (Michael Kitces) — Tue, 02 Nov 2010 12:35:21 -0500

Annuity owners sometimes wish to make a change to a portion of their annuity holdings without facing adverse tax consequences - and under current law, this can be accomplished by exchanging part of the existing annuity for a new contract on a tax-free basis. However, a recent private letter ruling from the IRS may have unintentionally expanded the flexibility of partial annuity exchanges to the point that they might not just be used, but could be abused as well.

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