I have never particularly liked individual variable life and annuity products. But one day, I came up with an individual variable annuity product idea. I don’t think it has ever been done. If it has been done, please note it in the comments below.
Most individual variable annuity products offer some hard to price guarantee:
- Guaranteed Minimum Death Benefit
- Guaranteed Minimum Accumulation Benefit
- Guaranteed Minimum Income Benefit
- Guaranteed Minimum Withdrawal Benefit
This product would have no such guarantees. It would also be sold by agents inside the mutual fund companies, and carry no commission. I call it T-shares, for deferred TAX shares. The insurance company offering this would go to mutual fund companies, and offer to train mutual fund company representatives to be insurance agents. The T-shares would have the same annual fee as the “no load” C-shares, plus 0.2%/year for the insurance company. The T-share buyer gets the option of having a tax-deferred mutual fund for the price of 0.2% extra per year.
Considering the ease of not having to track your cost basis on a mutual fund, and the additional growth from compounding what is not taxed, this could be a very attractive proposition. It would be interesting to have contractual provisions that allow the annuitant to be changed during the deferral period, even after death, so that the tax savings could continue.
There has to be a loser here, but who?
The obvious one is the taxman. Much of the mutual fund industry could end up issuing T-shares, instead of C-shares.
But the other one is not so obvious. I pitched this idea to a number of insurers. One said, “Great idea, but why should we cannibalize our existing block of variable annuity policies to make less?” That told me I needed to approach large life companies that had no variable products. So I spoke to one of the few that was like that, and the CEO was interested, but nothing came of it, because he left soon afterward.
As a buy-side analyst of insurers, I tossed the idea out to most of the life insurance CEOs I met that I knew had no individual variable annuity block of policies. No one bit. Maybe it would be the complexity of making the policy work across a large number of mutual fund companies. The IT expertise needed would be considerable. So would the legal documents.
But no one grabbed the idea and ran with it. Personally, I think a lot of people would like this product, but it never saw the light of day. Mmmm… I never talked to Assurant about this one….
On the other hand, maybe the place to start is with the mutual fund companies… they might have the greater interest.
PS — to those who are receiving buyout offers some life insurers on variable annuities with guarantees, turn them down. They are not offering you what the guarantees are truly worth. Unless you know something critical that they don’t, don’t take the buyout offer.
Full Disclosure: long AIZ, and many other insurers
By David Merkel, CFA of Aleph Blog
