Variable Annuity
Variable annuities are tax-deferred insurance contracts with an underlying value that fluctuates based on the performance of the underlying investments. These products often offer insurance benefits such as guaranteed income or a death benefit. The ability to annuitize assets into a guaranteed lifetime income stream is the fundamental feature that qualifies a product as an annuity.
The Market for Variable Annuities1
Total variable annuity sales in 2021 reached $125.6B, up 27% from 2020. Rising concern about changes to the tax code drove growth in investment-focused variable annuities, as they provide a tax-deferred option for investors beyond traditional retirement accounts. Sales increases were also influenced by RIAs and fee-based advisors seeking tax-deferred solutions for their clients portfolios.
DPL's View: Variable Annuities
These measures are created within the context of insurance products.
How Variable Annuities Work
The account value of a variable annuity fluctuates with the value of the investment, as assets are invested in the market. Clients have the ability to annuitize their assets into a lifetime income stream. Variable annuities are often sold with added features called riders that can provide additional benefits at added cost. Riders include living benefits, such as guaranteed lifetime income, or death benefits, such as a guaranteed return of premium to heirs, if the policyholder dies before annuitization and the account balance is less than premiums minus withdrawals.
Problems with Commissioned Variable Annuities
How to Think About Commission-Free Variable Annuities
When your client needs:
ANNUITY RESCUE+: For clients looking to move assets from their high-cost traditional annuity into a low-cost, Commission-Free product, a “1035 exchange” may be appropriate: Annuity Rescue+ may help clients achieve:
- Lower costs — if the goal is simply to achieve the lowest cost, DPL recommends using an investment-only variable annuity.
- Guaranteed income — often clients purchase an annuity because they like the guaranteed income feature. Depending on your investment approach, DPL will find the product that is best suited for you and your client.
- Tax-efficient withdrawal — if your client needs to begin taking income from an annuity, DPL can bring products and strategies to tax-efficiently withdraw funds.
- Return of premium — utilizing a 1035 exchange into a solution with a return of premium benefit can be a thoughtful way of essentially “locking in gains,” as the amount of the new premium will include any gains from the previous annuity.
TAX DEFERRED GROWTH: For high income earners, low-cost annuities can provide tax deferral to benefit portfolio growth during a client’s accumulation phase. Studies show that tax deferral can add 1.00% to 2.00% of additional net return to a client’s portfolio, when locating tax-inefficient investments within the annuity.3
GUARANTEED LIFETIME INCOME: While other product types are generally better options for guaranteed lifetime income, variable annuities can provide the greatest investment flexibility of the product types that offer this feature — potentially generating additional growth of the portfolio. It may be more appropriate to use a low-cost variable annuity during the accumulation phase and then, when the client is ready to begin taking out guaranteed lifetime income, move into the best available income product.
Variable Annuity
12021 Annuity Sales Highest In 13 Years, LIMRA Reports (2/2022)
2Average calculated based on DPL's product offerings with an asset-based M&E charge. TIAA M&E assumes a $100K-$499K account size.
3Morningstar Report: The Value of a Gamma Efficient Portfolio (2017)
Variable annuities are contracts purchased from a life insurance company that are designed for long-term retirement goals and are subject to market risk, including loss of principal.
No investment strategy insures a profit or protects against losses in a down market.
All guarantees are based on the financial strength and claims-paying ability of the issuing insurance company.
The purchase of an annuity within a retirement plan that already provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefits. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to recommending the purchase of an annuity within a tax-qualified retirement plan. In addition to surrender charges, withdrawals are subject to income tax.
Have more questions about our Variable Annuity options?
Call us at 888.327.0049 to speak to a DPL Consultant.