More people burst into banks and shout "This is a stick-up!" than come in asking for a variable annuity. That's all the more reason for bank advisors to initiate conversations about these often-misunderstood insurance/investment hybrids with their clients. VAs don't sell themselves.

At a time when near-retirees see few answers to their financial dilemmas-stalled or shrunken portfolios, laughably low risk-free returns and a sideways stock market-variable annuities (and their latest riders) may contain the solutions they want.

Variable annuities aren't for everyone, obviously. But with their tax-deferred mutual fund subaccounts, lifetime income options, deferral bonuses (aka rollups), they can provide what lots of people want: Upside potential and downside protection in one package.

Relative to advisors in other distribution channels, bank advisors have been successfully moving variable annuities. VA sales in other channels have declined, but the bank channel share of sales rose to 11% ($3.43 billion) of the total in the first quarter of 2010, up from 9.1% ($2.71 billion) a year earlier.

FIVE TOPS
What are the best-selling variable annuity contracts among bank customers? So far this quarter, the top five differ in flexibility and price, but they all contain options that can protect your clients from the most common financial risks associated with creating and sustaining retirement income. And at a time when advisors and clients should be conversing more often, they can also offer an excellent reason for a phone call.

The five best-selling variable annuities in the bank channel in the first quarter of this year were Perspective II from Jackson National Life, Advisors Plan III from Prudential, Best of America Future Venue from Nationwide, Pacific Voyages from Pacific Life and APEX II from Prudential.

As with most of today's leading variable annuities, these products offer one-stop shopping for the retirement-focused investor. They provide an opportunity for tax-deferred investing prior to retirement and a multitude of options for turning the savings into income after retirement. All are issued by insurers with top ratings for financial strength.

Each product has one or more guaranteed lifetime withdrawal benefit (GLWB) riders, the feature that has driven variable annuity sales since 2007. These riders, by definition, provide a floor income that clients can't outlive. But they don't require clients to annuitize or give up access to their money for emergencies. Of course, there's no free lunch: Withdrawals in excess of prescribed limits (with the exception, usually, of required minimum distributions, or RMDs) may reduce the guaranteed annual income.

Just as important, all of the GLWBs offered in these contracts include "rollups," or deferral bonuses, that increase the benefit base (the amount protected from market declines) by 5% or more a year until the 10th contract anniversary or the first withdrawal, whichever comes first.

Ignoring premium taxes, the most generous rollups ensure that someone who invested $100,000 in say, 2010, would have a guaranteed benefit base of at least $200,000 in 2020, on the condition that he or she took no withdrawals in the meantime. At the end of 10 years, the owner would be entitled to an income of 5% of the benefit base each year, or at least $10,000. If the actual account value is under $200,000 after 10 years, the client is, as they say, in the money. Keep in mind that the cash value of the annuity is the account value; the benefit base is a notional value used to calculate the annual payout. Also keep in mind that, the higher the fees, the slower the account value will grow.

The top five are all B-variable annuities, which require no upfront commission but do impose a surrender charge that typically starts at 7% and declines over seven years. Except for APEX II, which has a $10,000 minimum premium, they typical have relatively low minimum initial premiums, which fit the pocketbook of the typical bank customer.

Each contract delivers the same basic value proposition. They allow purchasers to invest with the option of ensuring that even if their account values drop dramatically, their retirement income stream is protected. That's the principal attraction of the GLWB.

The products differ, however, in ways that reflect a split in demand in the bank channel variable annuity market. That is, some bank customers (like variable annuity purchasers in general) go for the Jackson National and Prudential products, which tend to be option-rich and carry somewhat higher price tags.

But older, more conservative investors lean toward the slimmer, cost-conscious products, like Pacific Life Voyages and the Best of America Future Venue from Nationwide. (Note: Advisory Plan III and APEX II have since been replaced by the Premier line of VAs at Prudential).

Not coincidentally, Nationwide and Pacific Life are mutual companies (or, rather, contain mutual insurance companies within their corporate structures). Mutual insurers tend to be more conservative. In the VA world, "more conservative" means offering less risky and/or cheaper investment options, that is, lower hedging costs and lower prices. Their relative simplicity and low costs match the tastes of many bank customers. (Not all mutual insurer products are cheaper, however. A conservative company may offer lower payout rates on income annuities, for instance, because it maintains higher reserves).

That's probably why the BofA's Future Venue and Pacific Voyages contracts sold so well in the bank channel while they don't even appear among the top five contracts sold in the independent, wirehouse, regional broker-dealer or captive-agent channel. The Jackson National and Prudential products, by contrast, were among the sales leaders in the first quarter across all channels.

1. Jackson National Perspective II
Jackson National Life has seen its share of the variable annuity market jump since the financial crisis. Jackson has successfully appealed to advisors and investors who are more interested in lots of options and flexibility than in low cost. Recently, it added the popular American funds to their sub-account lineup.

Perspective II's leading GLWB option, the Joint Lifetime Freedom 6, increases the guaranteed benefit base by 6% a year or by 100% after 10 years as long as no withdrawals are taken. The current fee is 1.25%, but it can rise to a maximum of 1.86% if clients choose to mark their benefit base up to their account value on the account anniversary—which they would do only if the account value was growing faster than 6%.

This year, Jackson introduced an option that allows investors to withdraw more of their money each year in the event that high capital gains taxes on distributions from the contract threaten to reduce the annual income that the contract provides. (Remember that gains are withdrawn before principal in variable annuity contracts.) To compensate for that effect, Jackson lets the owner take out enough money, above the usual payout, to cover the taxes on the gains.

2. Prudential Advisors Plan III and APEX II
These contracts were replaced this year by Prudential's Premier series of variable annuities. Most of the investment choices, fees and optional riders in Premier appear to be comparable to those in ASAP III and APEX II, however.

Prudential's success in recent years—it led the industry with $4.87 billion in sales across all distribution channels in the first quarter of this year, for a 15.6% market share—was built on intense marketing, aggressive advisor support and, most of all, on the "Highest Daily 6 Plus" living benefit.

HD6 ensures that on every business day (for the first 10 years, assuming no withdrawals are taken) the client's benefit base is marked up by an annual rate of 6% or to the account value, if it is higher than the benefit base. To borrow an analogy from Aesop, the benefit base moves like a tortoise and the account value moves like a hare. The benefit base gets marked up to the position of the hare only if and when the hare is farther down the road than the tortoise. The best part is that the market peak for the year doesn't have to occur on the contract anniversary for the client to lock it in, as most other contracts require.

But there's a catch. When equity prices fall, Prudential automatically moves client money from equities to a fixed income account. When equity prices rise, the reverse occurs. This technique buffers the performance of the account, limiting both the highs and the lows, and reducing the risk that the account will ever go to zero during the client's lifetime. It's a little like buying fire insurance from a company that keeps a pumper truck and crew at your house 24/7.

Since Prudential minimizes its risk exposure this way, it can offer the HD6 benefit and still keep its fees roughly in line with other contracts (1.30% M&E, an administrative fee and 95 basis points, to a maximum of 1.50%) for the lifetime income option with spousal continuation.

3. Nationwide Best of America Future Venue
Nationwide's contract offers L.inc, a lifetime income rider that increases the benefit base by a simple 10% each year and guarantees that it will double after 10 years. The current rider fee is 1.20% for the joint contract. Nationwide's GLWB also offers a withdrawal rate of 5.25% to people ages 65 to 80. By contrast, Jackson National offers a 5% payout at age 65 but a 6% payout starting at age 75. Actuarially, the two payouts are probably the same. The difference is marketing.

Future Venue costs about 50 basis points a year less than Perspective II, not counting investments, but offers less investment freedom. Clients must commit their entire premium to one or more of seven asset allocation models. Clients who choose the 10% rollup can't choose the most aggressive of those models, which means that investments in growth or small-cap stocks, foreign equities or high-yield bonds may be strictly limited.

4. Pacific Life Voyages
Of the five top contracts sold in banks, Voyages is the most conservative and the cheapest. Its CoreProtect Advantage lifetime income option offers a 5% payout at age 65 but only a 5% annual rollup for 10 years (or until the first withdrawal) for a current annual charge of 1.05%. The less generous the rollup or payout rate, the less the insurer has to spend on hedging against a market decline and the lower the fees for the client.

The contract also offers two straightforward lifetime income riders without rollups, CoreIncome Advantage and CoreIncome Advantage 5, which offer a payout of 4% and 5% of the guaranteed benefit base at age 65, respectively, for annual fees of only 30 basis points and 40 basis points, respectively.

Voyages restricts those who choose a GLWB to four model portfolios, ranging from conservative to moderately aggressive, which limit exposure to riskier asset sub-classes, such as small-cap and international equities. For the conservative investor, such options might be perfectly adequate.

VARIABLE ANNUITIES MATTER
Today's strange economic climate makes this an excellent time to sell variable annuities with GLWBs and rollups. Older people want higher returns than they can get from CDs or bonds but they're afraid to invest in equities out of fear of another, even more lasting stock market crash.

Any of the products described here can help resolve their paralysis, enabling them to put money in balanced funds, get exposure to the upside (albeit with a high fee drag) and still sleep easily. If their account drops by a third or more-again!-they don't have to panic. Even during a downturn, their benefit base keeps growing. If the market stays down indefinitely, they'll still enjoy a floor income for life.

For advisors, VAs offer a good excuse to reach out and start new conversations about retirement with bank customers. During discouraging or confusing financial times, many advisors hesitate to call their clients. But, especially during hard times, advisors who understand variable annuities can often present themselves as the bearers of good news.

This story has been reprinted with permission from Financial Planning.

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