Somehow I just fail to understand the living benefit riders. Can you enlighten me what that would do for me? Is the main benefit a lock of a SWR as long as the insurer remains solvent? I do not want to annuitize and am not planning on living forever. I must be missing something.
I've had these a pretty long time and everytime they came up with a new idea and associated fee rider I just threw it in the trash figuring it wasn't designed for my benefit, maybe I missed something about the living benefit?
The original "living benefit" riders started about 11-12 years ago by the Hartford. They "guaranteed" a rate of return of 5-6% toward an "income base", which was NOT the account value. The only way to access the income base was to annuitize the contract, in effect, forefeiting your future rights to growth in the asset in return for a guaranteed income stream. This was quite successful because it was the first time a non-pension annuity was "able to do" what traditionally only defined benefit plans like govt or state workers could do, offer a lifetime income stream in a variable product. The annuitization requirement was not well received, but "guaranteed growth" was, particularly in the dark days after the tech bubble collapse.
With the continuing "freezes" and elimination of DB plans at large companies all over the US and the world for that matter, the large insurance companies saw a huge opportunity to grow their businesses in the VA market. Living benefit rider changes came fast and furious with "oneupmanship" happening on a near monthly basis. I could write several more pages of what all happened, but more importantly is what has happened in just the past 2-3 years.
The "required annuitization" guarantees have given way to true "living benefit" riders. That is, actuarily, companies have figured out how to offer a way to guarantee income streams without the client being forced to annuitize. It is a larger risk than they had taken on before, and how it ends up long into the future is anyone's guess. The product is NOT cheap to most folks, but lots of them are sold every year.
If you use large insurers like ING, Pacific Life, John Hancock, and Prudential, there is a reasonable assumption that they can "make good" on their promises. They can't completely mitigate the risk entirely, but have shown the ability to pay claims for many years, so there is that expectation. Here's an example to help illustrate. Others will be along shortly to rip on the product, but here goes.
You are 60 years old, and want a guaranteed stream of income to supplement your retirement income needs. You can use a VA with a living benefit rider that will cost your roughly 2.5-2.75% a year in yearly internal cost. What could you accomplish by doing that? Well:
1)A diversified mix of investments, covering most if not all asset classes, along with the ability to take more or less risk in the portfolios going forward.
2)A guaranteed return of principal regardless of market conditions to the beneficiaries.
3)A lifetime stream of income you can't outlive.
4)The ability to get raises in your monthly income if the market cooperates.
5)The living benefit riders offer an increase in what's called an "income base" (in effect, a contractual amount you can draw from but not take a lump sum of) at a set percentage regardless of market conditions.
6)Tax-deferral for non-qualified monies.
Theoretically, one could see how some folks might be interested in these, particularly those not covered by a solid pension and not into managing their finances and taking the responsibility of managing their own money.
Most companies today are offering a 7% increase in your "income base" for 10 years. What they means is you give them $100,000, and the "income base" will double to roughly $200,000 in 10 years. If the market does better than that on a yearly, quarterly, or daily basis (depending on the company), the income base will adjust upward and you could conceptually get a "raise" in good years, while being provided a "floor" if the market tanks. If you're 60 years old in the above scenario, and you decide to draw income, you would be able to take 5% a year, or $10,000 a year for life, even if your account value is down 50% or even more because the insurer is "guaranteeing" against market risk. If your account value was $150,000 at the end of 10 years (iffy market) and you needed income, well, 5% would be $7500 a year, not $10,000. Most folks would prefer the higher dollar amount. If the account value is greater than $200,000, you could walk away with the lump sum.
The products are expensive because other than Fido, no one else wants to put the promises on there. Fido's product is good but not cutting edge, and has limitations. Vanguard would never put the guarantee on their AIG VA because their ER would have to be above 1%, not going to happen.............
Assuming the insurer remains solvent (I would NEVER get one from anyone other than the 4-5 largest insurers in the world), this could work for some people to help fund retirement. Many on here will argue you can achieve the same thing using a combination of a Treasury or CD ladder and a conservative mutual fund, options, etc, and they are probably right to some degree. Vanguard seems very excited about their guaranteed payout funds. To me, it is a little funny because Vanguard has not "invented" some cutting edge strategy. I believe it is in direct response to the large surge in VA sales. But they would never admit that.........
Sorry for the long diatribe............
