Annuities

Running Marathons and Michelangelo’s Paintings:
Why Pay More for Living Benefits When You Can Manage Risk with a Low-Cost VA?
by Ted Kerr

The flat-insurance fee is a landmark in the evolution of variable annuities and it will redefine the annuity industry. Where do clients turn when they max out their 401(k)s and IRAs? Variable annuities with a flat-insurance fee are designed to help owners save more and save faster. The typical VA charges asset-based fees for everything from mortality and expense to insurance guarantees, which means that clients aren’t accumulating as much as they could. A flat-insurance fee VA has the edge over a traditional VA and even certain taxable investments because it cuts the cost of tax deferral and eliminates fees that can chew up a client’s return. My clients may reach their goals faster by reducing these expenses.

The Flat Fee Trumps Other VAs

Traditional VAs don’t offer a good cost-benefit ratio. Costs can escalate quickly, especially the more a client invests and the more their investments grow. Fees for a typical VA can reach 3% to 4% per year or more when you add a death benefit, a living benefit, a step-up to lock in gains, and other insurance guarantees. According to 2007 Morningstar data, a $100,000 VA costs $1,350 per year with a mortality and expense charge averaging 1.35%. A $250,000 VA ratchets up to $3,375.
With this new type of VA, a client pays one flat insurance fee as low as $240 per year no matter how much they invest. (Like all VAs, the customer pays the fees of the underlying funds, plus those of any advisor hired. Combine that cost savings with no commissions, and clients begin to see variable annuities differently.

Why Pay for Guarantees?

More than 70% of VAs that were sold in 2006 included a living benefit, according to the National Association of Variable Annuities. But I’m not on the living-benefits bandwagon. Why do I go against the grain in the face of their overwhelming popularity? People buy living benefits out of fear. But living benefits may not be necessary when I could produce more for my client over the years through proper investment selection and tax-deferred accumulation.
I typically recommend a plan that emphasizes long-term accumulation for clients who want lifelong income. It doesn’t always make sense to pay for an income benefit that may not be used for years or even decades. In fact, the typical VA equation can often hinder a client’s ability to generate lifetime income. Also, clients who view living benefits as a quick fix for retirement income must still face the fact that they can’t make up for what they haven’t saved.
As for the death benefits offered by typical VAs, it’s the most expensive life insurance out there. Once I explain that the vast majority of owners will never use a VA’s death-benefit protection, my clients often agree that it’s not in their best interest. One way to explain it goes like this: If you were asked to run a marathon, would you want to carry a 40-pound pack on your back filled with a first aid kit, additional food and a second pair of clothing? Well, common sense tells you that you’d expect to finish the race without needing those things and that they would actually inhibit your performance, not help you to finish the race faster.

Breaking the Investment Barrier

Part of my value-added proposition is providing ongoing investment consulting services. That’s why having a broad investment lineup is as important as the flat-insurance fee.
Traditional VAs are commonly restricted to a handful of investment options, which may reduce the potential for greater investment returns. It would be like telling Michelangelo that he could only paint using primary colors. Would he have still been a great painter? Yes, but the paintings themselves would not have been as good.
In contrast, flat-insurance fee VAs are designed to serve as a tax-deferred investment platform with more than 170 fund choices representing a diverse range of asset classes and strategies. Expanding the fund choices within VAs has broken the investment barrier.
It’s just plain foolish to ignore the benefits of tax-deferral. But it takes a low-cost, flat-insurance fee VA to unlock that power. I usually recommend a flat-insurance fee VA for high-income investors who’ve exhausted other tax-deferred options and have no need for current liquidity. I also use them for clients who have a financial windfall and want to preserve the assets for the long term.
Many of my clients who have long-term savings goals are familiar with traditional VAs and their high costs. So, when I start going over the money that can be saved using a flat-insurance fee VA, my clients are in disbelief. The fee is the first thing that stands out. Once they understand that they can pay a flat fee as low as $240 a year instead of a percent of their assets, they’re very quick to see how much more they can accumulate and how much faster they’ll reach their goal. q
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Ted Kerr is the founder and president of Kerr Financial Group and is an investment advisor representative of Commonwealth Financial Network. Founded in May 2000, Kerr Financial provides consulting services on more than $70 million in investment assets to more than 200 families, small businesses, and foundations. To learn more, visit http://www.kerrfinancialgroup.com. Kerr is a member of the Financial Services Institute and a former director of the Pittsburgh Chapter of the Institute of Certified Financial Planners.
Jefferson National Life Insurance Company has launched Monument Advisor, the first variable annuity with a flat-insurance fee for both fee-based and fee-only advisors. For more information, call 866-WHY-FLAT (866-949-3528) or visit www.jeffnat.com.

The Challenge
Finding an annuity that’s priced to fit the fee based model

The Solution
A variable annuity with a flat-insurance fee and a tax-deferred investment platform with an exceptional number of fund choices

Advisor Value
When advisors manage risk, clients save more

Client Value
The more clients accumulate, the more income they can generate