A Context for Considering Variable Annuities with Living Benefit Riders

Robinson, John H.
May 2008
Journal of Financial Planning;May2008, Vol. 21 Issue 5, p56
Academic Journal
• This paper provides an objective framework for helping financial advisors assess the merits of variable annuities with living benefit riders. The first part introduces advisors to the current state of academic research on the subject. The second part provides a context for evaluating a variable annuity with a popular guaranteed lifetime withdrawal benefit (GLWB) rider if such a product had been available for purchase before two historical "worst case" market scenarios. • The academic community is increasingly accepting of the concept of living benefit riders as a tool for helping retirees insure portfolios against sequence-of-returns risk and longevity risk. • The irrevocability and low internal rates of return of immediate annuities have likely been barriers to their acceptance. Greater flexibility, higher potential returns, and revocability may make variable annuities with GLWB riders a superior alternative to immediate annuity contracts. • Back-testing of a hypothetical variable annuity with a 5 percent GLWB rider indicates that the 1973-1974 bear market was not long enough or severe enough to force the insurer to meet its guaranteed income obligations through reserves. But the 2000-2002 bear market data suggest that insurance carriers do indeed take on a degree of investment risk in return for the rider premiums they collect. • The high expenses of variable annuities significantly moderate sub-account performance relative to comparable lower-cost mutual funds, and may lead some readers to conclude that mutual funds are a superior planning option. Alternatively, other advisors may find value in the security they provide during bear market nadirs. This peace of mind may help investors avoid panic selling, remain appropriately weighted in equities, and remain disciplined in their allocation decisions.


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