Investment-only variable annuities (IOVAs) are playing an important role in the annuity industry right now, in part because traditional variable annuities are taking a step back. Think Advisor’s Robert Bloink and William H. Byrnes discussed the increasing popularity of IOVAs in the article “Optional Death Benefits Broaden Investment-Only VAs’ Surge.” This type of variable annuity product doesn’t offer the guarantees that people have come to expect from traditional variable annuities, but they offer enough to make them desirable to consumers right now. They cost less, offer a different kind of investment potential and are now starting to offer some death benefits to up the ante on their demand.
These new investment-only variable annuities are tax-deferred and focus on the investment potential you can receive. They do not guarantee lifetime income, a benefit that many people have become accustomed to with annuity products. Lifetime income guarantees come with fees that are around 2-3% annually and can take away from any returns earned with traditional variable annuity products. IOVAs have much lower fees, which gives you the potential for much greater investment growth. You have a plethora of investment choices, including more well known investment portfolios, but there are also alternative investment choices that the average client doesn’t normally have access to. Through the use of hedging strategies and diversification, investment-only variable annuities create their own type of downside protection.
Although there is great investment potential with IOVAs, some advisors don’t think that alone is worth purchasing one with money that is already in a retirement account. But the added death benefit options becoming increasingly available make investment-only variable annuities desirable to an even broader range of clients. There is a standard death benefit with most IOVAs that offers a return of account value. Some new death benefit options have come across recently. You can get a lower cost return of premium benefit or you can pay more for a guaranteed minimum death benefit. Some insurers are offering a highest anniversary death benefit where you are paid out the highest value of three options. Death benefit options typically have to be added when you purchase your annuity but can be canceled anytime. Most are only an option for clients younger than age 85.
Investment-only variable annuities are not right for everyone, but they offer some unique benefits as a retirement savings growth vehicle. Investors have to be young enough to have enough time to potentially grow their money. These products often are able to provide greater growth than traditional variable annuities because of their lower fees. New death benefit options are making investment-only variable annuities even more desirable to consumers. Speak with an expert at Annuity FYI if you have any questions about IOVAs or using annuities in your retirement income planning.
Written by Rachel Summit