Understand Variable Annuities: Get the Most Bang For Your Buck

Posted By on Dec 9, 2013|2 comments


Disclosure: For investment professional use only.  This is not intended as investment advice, but rather to provide an opinion by a financial professional to other financial professionals about a type of investment product.

Variable annuities are one of the hottest financial items selling today. The benefit they offer is in the added rider one can receive to guarantee income or growth. However, variable annuities can be difficult to decipher.  Understanding options is critical in solving what is best for your client, but most financial advisors don’t have the time to crunch the numbers, so we’ve done the groundwork for you.

Vagaries of Variable Annuities

Getting the most out of a variable annuity requires extensive research in order to see exactly what is in store. The guarantees from variable annuities look good compared to what the S&P 500 has provided over the last 14 years. In recent years, the stock market has fluctuated up and down but the S&P 500 has only returned a total of 32% since September of 1999 to 2013. On a simple annual basis, this is 2% per year. No wonder variable annuities with guarantees of 5% and 6% returns are selling well. However, to get the most out of a variable annuity requires research and reading through the entire prospectus to see exactly what you are getting.

Why not jump right in?  When I was 22 and a new research analyst at the Gartner Group, a friend of my mother, who was newly divorced and trying to make a living as a broker for Northwest Mutual, came to my office and pitched me on buying life insurance. This was a whole life insurance policy (permanent).  I didn’t have any concerns and certainly no beneficiaries that I needed to take care of.  What did I need life insurance for?  I told her I would look at the numbers.

As any analyst would, I spread the numbers. I calculated what the returns would be versus investing.  This was 1994, just two years before the US had gone through a recession and stocks prices were still relatively low, as we had not experienced the Internet bubble yet.  I compared the outlook I had for investing versus putting my money in the Northwest Mutual policy. The policy would not start making money for three years, and I had a host of good investments that I liked that were significantly undervalued.  Even taking into account the tax benefits of being in a life insurance policy, the cost of the policy outweighed the returns. I took a pass. And I am glad I did, because my investments in Gartner Group, Coca-Cola, Dairy Queen and Gen Re far surpassed the S&P 500 and certainly the life insurance policy.

Creating projections helped me make a decision.

Comparing Variable Annuities

We have reviewed three of the most popular and successful variable annuities in order for financial advisors to provide your clients with a better understanding about each. AXA Equitable Retirement Cornerstone℠, Allianz Vision℠ with Income Protector and Vanguard®’s bells and whistles differ, but they each guarantee a certain level of return for investment. We’ve dissected each one, accessed the benefits of riders that guarantee income or growth, and offer recommendations for each market scenario including when the market is overvalued – such as it is now, based on the cyclically adjusted price-to-earnings ratio or the price-to-earnings 10 ratio –  and when the market is undervalued. Find out more in our free ebook, which you can download below by submitting your name and email.

Next Steps

First and foremost, you need to understand what your client wants and needs. As a financial advisor, simply selling does not help the client. Ask yourself, “Does the client want to grow the initial investment or gain greater yearly income?” Second, as a financial planner you need to decide whether the market is closer to being under or overvalued. These steps will help you and your client select a variable annuity or benefit that is right for them. Then check out our ebook about variable annuities by submitting your information below to learn more about the differences between AXA Equitable Retirement Cornerstone℠, Allianz Vision℠ with Income Protector and Vanguard®, which one may work best for your client,  and when is the right time to choose a variable annuity.


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2 Comments

  1. After 50 years in the insurance/annuity business, I don’t think it’s a practice for people to lose monies on their investment because they die. There is a cash refund of the remaining capital due to an early death. Also, at the point of sale, you can guarantee the return of capital by guaranteeing the policy for 10-15-20 years. There are also great tax benefits (return of capital) if they are after tax investments.

    A good financial adviser should never allow a family to lose money with purchasing a fixed annuity.

    Post a Reply
    • Good Response. Setting up investments for estate planning and making sure if some dies that they have enough income is important. Thanks for point out that clarification.

      Post a Reply

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