FIAs as Solution For Worst-Case Scenarios
Wealth manager Michael Fein is no stranger to variable annuities. But he has decided that he likes fixed index annuities better because “you can use them for worst-case scenarios.”
This entails going through everything in the portfolio and assessing what growth and income will look like in a worst-case scenario, using guarantees and net of expenses, said Fein, who is co-chairman and president of CIC Wealth Management, Gaithersburg, Md.
The fixed index annuity takes the position of a pension-like insurance product for this purpose, he said.
“It’s not shiny, and it’s not fancy. But it is sleep at night. If the market goes south, we have some areas to touch in retirement rather the stock position. We’ll go into the annuities, the cash value policies,” to get through until the stocks recover, he said.
Fein likes the indexed policies for another reason too, and that is simplicity.
“The variable annuities have so many moving parts, and they have so many pages in the prospectus, probably most people who sell them don’t understand them,” he said.
By comparison, fixed index annuities are only "a couple of pages.”
The equity mirror
Fein said he prefers calling the products equity indexed annuities — the term originally given to annuities that link upside interest crediting to growth of a securities index — because the term is a reminder that the product “mirrors” something of the equities market.
He is aware that the insurance industry has campaigned to change the name of the products to fixed index annuities — an action taken to underscore that the policies have a downside guarantee.
But in Fein's view, the products are not fixed in the sense that the customer always has the ability to take back the original principal. “You have a surrender charge and expenses that could eat away at the account value.” (This would be if the surrender occurs before the end of the surrender charge period.)
Bonds and money market accounts are not fixed either, he added. “Fixed implies guaranteed, and they’re not guaranteed,” he said, citing as an example the time during the last recession when the net asset value of money markets dropped under a dollar.
The indexed products do guarantee income, he added, if sold with a guaranteed living benefits rider, which is his preference. This is what makes it a form of pension for the customer, he said. “We build that right into the plan. The customer starts income in, say, 11 years.”
In some cases, a customer might need the money earlier than that, he allowed, so “sometimes we ladder the annuities, by adding a second one which starts income earlier.”
Some clients split it between the husband and wife, he added. Some take the option to add a spousal continuation rider at time of taking income or at death.
He likes that the annuities provide options. For instance, he uses them in life to 100 scenarios. At the older ages, “all the income a person might have might be from Social Security and the equity indexed annuity — or some of the older variable annuities.”
Fein emphasized that he is not pooh-poohing today’s variable annuities. But it is today’s equity indexed annuity that he prefers using for the worst-case scenario part of a financial plan. “That’s where they fit.”
One couple, both accountants, took the worst-case-scenario thinking one step further. They had researched annuities on their own, as many consumers do today. In the process, they learned about the state guaranty funds. They asked Fein if they could buy an annuity in one state and another annuity in another state so as to maximize their state guaranty fund protection should the respective carriers collapse.
“I’m not allowed to bring up the guaranty funds with clients, but they brought it up, so I had to respond. I told them I had never thought of that, but yes, they could do that if they wish.” They did just that.
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