Monday, January 04, 2010

Product Update: Variable Annuities

We don't write a lot about variable products, but they can be a valuable part of one's insurance portfolio. Briefly, variable products, such as annuities or life insurance, are cash-value insurance policies with "sub-accounts" that mimic mutual funds. In addition to regular state insurance licenses, agents who sell these plans must also be registered with the Fed's, and require additional training and accreditation.

"Fixed" products, which don't have these kinds of requirements, depend on the insurer to determine rates of return. On the other hand, they do include a (modest) interest rate guarantee - a kind of "floor" below which rates cannot, by contract, fall. Variable products typically don't have these, because the carrier has no way of knowing what kinds of "investments" you'll be making. In other words, almost all the risk is on the insured; on the other hand, they hold the potential for greater returns than fixed policies.

Variable annuities are, simply, cash vehicles that offer the purchaser some tax advantages over CD's or mutual funds. As with all investment-type vehicles, they come with a lot of extra paperwork (e.g. prospectuses, disclosure agreements, etc). Until recently, these plans were considered pretty consumer-friendly, meaning that they offered some pretty decent returns without a lot of risk. That, of course, cost the insurers money, so a new generation of these vehicles is hitting the market:

"...for an additional fee, consumers can buy downside protection. In simplest terms, the safety net often works like this: If the funds perform poorly, the consumer can swap the shrunken sums in them for lifetime payments of a guaranteed-minimum amount.

Those guarantees of lifetime payments were a major strain on insurers after the market slide of 2008 and 2009. Insurers quickly pulled the juiciest deals off the market—subbing in less-generous versions at higher prices

In a way, that stands to reason: if one's downside is essentially put back on the, um, backs of insurers, one is going to come out ahead, regardless of market performance. While that's a laudable goal from the consumer's side, it's not a good deal for the carriers (or their stakeholders). The new products come with some new rules which make it more challenging for consumers to put off that risk. While these plans remain a valid, and valuable, tool for retirement planning, they also require more consumer discipline and knowledge. If this is the kind of thing you might be interested in buying (or even just considering), seek out a professional, independent agent with at least 7 to 10 years of relevant experience (and, of course, proper credentialing).

Best of luck with your 2010 retirement planning!
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