VAs that wrap around qualified assets, like IRAs, are now gaining traction in a fitful economy.
Just in case anyone needed reminding, the stock market's latest fit of volatility this summer reinforced to advisors and their retirement-minded clients the importance of protecting qualified assets. So it's no wonder that a breed of variable annuity built to underpin qualified individual retirement accounts with income and death benefit guarantees is finding a stronger foothold in the annuity market.
Indeed, sales of variable annuities in a qualified setting now outpace sales of nonqualified VAs by about two to one, according to the Insured Retirement Institute. Meanwhile, an estimated 60 percent of VA contract assets now reside in qualified accounts. As more investors and advisors evidently see the merits of using an IRA-based variable annuity as an insurance wrapper around their qualified money, insurers such as Lincoln, John Hancock, Western & Southern and others are taking direct aim at that segment with a growing variety of IRA-tailored offerings designed specifically to capture qualified retirement plan money.
"They're really targeting those 401(k) and 403(b) [retirement account] assets," observes Kevin Loffredi, vice president, annuity solutions, at Morningstar, Inc., in Chicago. "When you look at the numbers–where the money is going, qualified versus non-qualified–the majority of the money [being used to purchase variable annuities] is coming from qualified accounts."
What about the argument that owning a VA inside a qualified account makes little sense because of tax-deferral redundancy? Why put a VA with tax-deferral qualities inside an IRA where assets already get tax deferral? Yet nowadays many investors and their advisors appear content to live with that redundancy in order to protect IRA holdings with insured living and death benefit guarantees while also gaining access to upside market potential.
"The tax deferral [aspect of the VA] is moot, so really you're buying this for the death benefit, and even more so, for the living benefit–the guaranteed lifetime income," says Loffredi.
"It's for folks who are either in retirement–in the distribution phase–or preparing for that phase of their life," adds Mark E. Caner, Cincinnati-based president of W&S Financial Group Distributors, Inc., the wholesale distribution subsidiary of Western & Southern, referring to his company's Variable Annuity for Roll Over Only Money (VAROOM).
W&S touts VAROOM as the first VA to invest in ETF subaccounts. As its name suggests, it is aimed at retirees and job-changers seeking a home for qualified rollover money. The tax structure of the product–a VA inside an IRA–gives investors direct access to individual ETFs from iShares and Vanguard across a range of equity, fixed income, international and alternative asset classes. And because those ETFs are passively managed, their lower expenses translate into a lower-fee VA.
The VA inside an IRA segment
VAROOM has company in the VA-inside-an-IRA segment. For example, MetLife offers its RMD-friendly guaranteed minimum income benefit, GMIB Plus III, with some of its variable annuities purchased with qualified money. The optional feature allows the contract holder to take RMDs while maintaining and potentially growing the income and/or death benefit.
