Thanks to Prudential for inviting me to a presentation (and dinner!) by Prudential Regional Vice-President Gary Woodward on Prudential’s HD (Highest Daily) Lifetime 7 Plus Variable Annuity product. As you well know, the primary purpose of a variable annuity is as a mechanism to save money during a person’s working years which can then be used to draw upon as an income stream during retirement. It’s not available as a lump sum, obviously.

The “highest daily 7″ qualifier to this particular variable annuity refers to the product’s feature wherein a fixed 7% interest rate is applied to the highest value that an account reaches before the investor actually starts withdrawing money. The effect of this feature is to protect the investor’s downside risk. Here’s a snip from the product brochure which may help you understand what’s going on:

The upshot of using this variable annuity (either inside an IRA wrapper, or as a supplement to a current IRA or 401(k)) is that the investor is protected from severe market downturns and volatility. For the most part. Like all annuities, there are various withdrawal options available, and one of the key features of this product is that annuitization is not required in order to begin taking an income stream based on the 7% projected value in the account.

Obviously, when something is ‘too good to be true,’ it usually is, and like all annuities, there are lots of “gotcha’s” in this product which detract from the beautiful graphics in the marketing materials. The folks at Prudential are not stupid; it’s not a non-profit organization, and they’re not in business to give away guarantees for free. All of the fees and charges and “gotcha’s” are buried in the prospectus, which I think for this product exceeds 500 pages, so gets read by exactly no one.

Which is the primary reason the advisor-client relationship of trust and confidence is so much more important than the actual nuts and bolts of the contracts. All of the large insurers have great annuity products which have similar features to Pru’s HD Lifetime 7 variable annuity. And all are ‘no-brainers’, in my opinion, as far as being an investment vehicle which is suitable for the overwhelming majority of Americans, whose 401(k)’s are now 101(k)’s. Is Pru’s product better than MetLife’s or John Hancock’s or Mass Mutual’s or AXA/Equitable’s variable annuity? I don’t know, because that’s an investor-specific question. They all have different features and costs; which one is right for your client is why you really, really need to do your homework and ask hard questions of your annuity wholesalers.

Nevertheless, as an advisor you need to checkout Prudential’s HD Lifetime 7 variable annuity product and consider it carefully as you’re advising your clients on their retirement planning.

This is  fun article on the math of life annuities that you can show inexperienced clients.

Also, you want to talk to your client about the various beneficiary selections available when they purchase the contract. In other words, annuities are unbeatable investments while people are alive and during retirement. At death, they can be taxed pretty heavily. The tax treatment of annuities at death is a pretty complex topic, partially because of the available of the product inside and outside of an IRA, and because of the various living benefit features; whether the contract owner has or has not started to take withdrawals at death; whether the contract is the ’spousal’ variable annuity product; whether the named beneficiary has predeceased the owner, and so now the annuity becomes part of the decedent’s probate estate. What type of post-mortem planning is available when the contract owner dies? Are there different options available depending on whether the decedent had a will, or died intestate? Are there Private Letter Rulings which may be applicable to answer these questions? The answer is ‘yes.’ All reasons why as a financial planner you should call in an experienced estate planning lawyer to help develop the client’s financial and estate plan.

Thanks again to Prudential and Regional VP Gary Woodward.

Take a look at my last post on Financial Planning.