retirement

Variable annuities on cusp of change

Hi, I'm Dennis Hopper. Remember me from "Easy Rider" and "Blue Velvet"? I'd like to rap with you a minute about variable annuities. ...

No, you're not having a '60s flashback. It's merely the first wave of the really far-out trip formerly known as retirement.

Hopper's over-the-top TV commercials for Ameriprise, in which cinema's bad boy rants from a desert floor (note the subtle imagery), are the latest attempt by the financial services establishment to pitch its products to rebels without a pause -- the baby boomers.

Annuities
Variable annuities have gotten bad press, sometimes deservedly so, but don't write these insurance products off altogether.
Not your grandmother's annuity
  1. Target market: cash-rich boomers
  2. What's a vriable annuity?
  3. A mixed reputation
  4. Not supposed to solve all problems
  5. Designed to provide (emotional) security
  6. Tough product to evaluate
  7. "War and Peace" complexity
  8. Living benefits

Target market: cash-rich boomers 

Small wonder. The financial research firm Tiburon Strategic Advisors says the cash generated as 76 million baby boomers sell their businesses, downsize their homes and liquidate their 401(k)s is expected to nearly double consumer investable income from $17 trillion to $30 trillion by 2010.

What right-thinking insurance provider wouldn't want a larger slice of that pie?

As baby boomers make the transition from workaday accumulation to budgeting for the back nine (don't mention the R-word, man), financial institutions are giving their variable annuity products a makeover in hopes of attracting a greater market share, especially those major bucks expected to roll over from qualified retirement plans into IRAs.

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Rest assured, these aren't your grandmother's annuities. Instead, they are packed with a growing menu of options known collectively as living benefits that, in theory, will allow aging boomers to have their cake (a lifetime stream of income) and eat it too (greater and prolonged participation in equity markets without risk to principal).

"I think the living benefits have really been driving annuity sales," says Mark Mackey, president and chief executive officer of NAVA, the Association of Insured Retirement Solutions. "Someone who is 62 or 64, if they're in good health, they may need to make their money last 25 or 30 years, so they really need to continue exposure to the equity market in order to do that. With the principal protection of the living benefit, it allows people to have their equity exposure but it protects them from a downturn for which they might not have enough time otherwise to recover."

What's a variable annuity? 

Quick refresher: A variable annuity is a financial product with an insurance wrapper that offers three things mutual funds typically do not -- tax-deferred treatment of earnings, a death benefit and an annuity stream that can provide guaranteed income for life. Like their cousin the fixed annuity, they can be purchased to begin paying out immediately (an immediate annuity) or at a future date (deferred annuity). Unlike a fixed annuity, variable annuities offer exposure to potentially greater earnings through their underlying portfolio of stock, bond and money market investments.

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