How To Assess Unwanted Legacy Annuities – ValueWalk Premium
Investment Geniuses

How To Assess Unwanted Legacy Annuities

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Q3 hedge fund letters, conference, scoops etc

Legacy Annuities

As an insurance consultant to RIAs, I review legacy annuities. Every case is unique, but often I’m reminded why commission-based annuities are one of the biggest violators of consumer value within financial services.

Rider-driven variable annuities are the most common review-requests that I receive. They tend to be the most complex and expensive. Often, the policy owner doesn’t understand the product or even know why they own it.

For the advisor, an annuity review often will create more questions than it answers. RIAs are left asking, “How can I improve upon something I didn’t sell to my client, and, frankly, didn’t want to inherit?”

Here are some practical strategies that RIAs can use to more easily assess a clients’ existing variable annuity:

  1. Start with a suitability check

Nobody knows your client’s financial needs better than you. As you begin your annuity review, focus on general suitability. Consider if and how the annuity will help your client achieve their goals.

For example, many variable annuities are purchased to achieve growth and provide guaranteed income. It’s important to determine whether growth and especially income will be needed or wanted from the policy. The client may already have those needs met elsewhere. I often see a client paying high fees for a contract with features that they don’t plan to use. If growth is an objective for your client, examine the level of insurance the annuity offers for protection against losses within the rider. This is important, since logic dictates that allocations should shift into conservative funds to protect against sequence-of-returns risk as a client ages. If the annuity is designed to insure against market losses, there is arguably no need to be conservative, since the risk has shifted to the insurer, albeit at a high cost. I see this misstep often.

In terms of guaranteed income, advisors often don’t liquidate policies because they are afraid of giving up any guaranteed values. Does your client need or want to take withdrawals? How much are they paying for the guaranteed withdrawal they will receive? It’s important to know the numbers, as well as the objectives. This way, thoughtful consideration is given to replacing an annuity with a more suitable product or liquidating it, or simply leveraging the features of the existing product. This consideration is important, especially when compared to the costs of doing nothing.

  1. Skim the statements

When reviewing an annuity, I start with the basics. Policy statements may help you uncover some interesting things:

Look at the policy issue date. Older-vintage variable annuities with guarantees may hold additional consumer value, especially if the policy was issued before the financial crisis in 2008. Policies issued after 2009 were mostly repriced, as insurers saw worst-case scenarios test their guarantees. This means potential cost advantages or higher guarantees may exist in annuities issued prior to 2009.

Check values. Review the statement for values such as surrender amount, cash value and death-benefit amount. Discrepancies between cash and surrender values will reveal if there is a penalty for moving or closing the account.

Check for enhanced rider values. Included on the statement will be the death-benefit amount of the policy, which will be paid to a beneficiary. Sometimes enhanced riders will lock in initial premiums or high-value anniversary amounts. Review the death-benefit values against the cash value; it may uncover additional insurance within the policy to provide legacy assets to heirs. Additionally, many variable annuities are sold with the promise of income, which the owner can’t outlive. They offer riders that provide for income or withdrawals for life. On a statement, look for values associated with ”guaranteed benefit amounts” or ”guaranteed base values.” While these values cannot be fully accessed for immediate withdrawal, they are used to determine how much income can be drawn from the policy over the client’s life. A quick way to gauge consumer value when looking into these riders is if the stated “income base” is higher than the cash value. Also, calculate the size of that gap. This way, you can see if the client is paying for an enhanced value that they can use. The goal is to identity the amount of lifetime income that can be drawn. Sometimes the figure is included on the statement. Sometimes it’s not. Before changing anything within this type of contract, additional research is recommended. The product prospectus, often online, will have the information you need.

Read the full article here by Jeffrey Rancourt, Advisor Perspectives

Saved Articles