“The best ‘worst case’ alternative” – that’s how a large variable annuity producer recently described and positioned fixed-index annuities with income riders. It’s not the most ringing of endorsements – a glass-half-empty view – but it’s still extremely significant and impactful.
I would argue that a more accurate description may be, “the best ‘most probable outcome’ alternative” – a glass-almost-full view.
Whether you see the glass as half empty or half full, making the right choice between VA and FIA income riders can mean the difference between having a client whose objectives and expectations have been met OR having a client who may have to settle for less than expected – or worse.
There are three steps to making a good decision:
- Collect all of the available facts
- Consider possible and probable factors that may influence those facts
- Take action … or not (Inaction is also a decision)
Positive or negative, whatever happens after the decision is made won’t change the fact that you made the best possible decision.
So, if we just look at the income rider portion of the VA or FIA choice, what are the facts you should consider to help your client make a good decision?
- FIA rollup percentages are routinely greater than those of VAs
- FIA payout percentages, on the income values, are higher than VAs
- If a FIA gives your client a higher, guaranteed income value AND pays a greater guaranteed percentage on that value, your client gets greater guaranteed lifetime income from a FIA!
Next, what other factors should you consider in your decision process?
- Performance – VAs were designed to be performance engines. With a VA, it is argued that if the returns out-perform the rollups, the client benefits with higher-than-guaranteed income. That is true, but:
- How likely is that to happen? With an assumed VA fee of 3.5 percent to overcome and a guaranteed rollup of 6 percent, how likely is it that a 9.5 percent return will be realized in a VA to actually increase the guaranteed income payout? Also, even though high returns can occur in a VA in any given year, the total return of the VA must overcome fees and exceed the rollup over the entire deferral period, not just in a given year!
- The same thing can be said of FIAs. Though it’s less likely to occur in a FIA than in a VA, it does happen. Case in point, I recently received policy statements on two clients whose five-year FIA performance has out-performed their rollup values.
- Increasing income opportunity once income is elected – If your client considers income important now, won’t it be even more important in the future – perhaps even critical? Increasingly, FIAs are offering clients income checks that increase and lock in as the selected indexes perform. While VAs may claim to offer opportunity here, evidence that this actually happens is not readily available.
- Protection of the accumulated account value – While it is critical for our clients to plan, the best-laid plans don’t always work out or reach fruition. If everything goes well (glass half full) and the market cooperates, your choice of either a VA or FIA with an income rider may not be that critical – they’ll both perform, the income riders will kick in and perhaps the VA will even provide a little extra income due to long-term, solid subaccount performance.
BUT … (glass half empty) if circumstances are such that your client can’t wait the planned number of years to take income, and they need access to their account values NOW, poor market performance in the VA could result in a diminished account value or even one less than the original contract deposit. This would not happen in a FIA.
In summary, a FIA provides greater guaranteed income – that can be structured to increase – as well as an account value protected from negative market performance. A VA could potentially provide a somewhat higher guaranteed income and a fluctuating account value.
So, what’s your decision? A FIA? A VA? A combination of both?