The Product that Never saw the Light of Day

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


  • Greg says:

    The big loser for this plan (which I personally like) would be every fund company that sells 401Ks or IRA accounts.

    In essence, this tax deferral idea (which I like) is a retirement account.

    Many 401K offerings charge obscene management fees — well in excess of 1%, never mind 0.2%.

    IRA deposits are limited to ~$5K per year (less historically, more going forward, etc). These T-shares would have no deposit limit … that would benefit the fund companies, but destroy all the shucksters selling pension funds by whatever name.

    How can Common Fund and TIAA-CREF charge 2% of assets if “rational investors” in non-profit universities figure out they can pay 1/10th of that?

    How can union pension funds charge 3-4% (embedded costs, not reported) when the smartest (and probably better paid) members can get a much better deal, without the seniority / lock in costs of staying with one local xxx union?

    On the other hand, big legacy companies (see the news on UPS today) might benefit from offloading their pension funds to mutual fund companies — if they can get beneficiaries to accept investment risk (in exchange for losing employer credit / going out of business risks). Here the big loser would be the bureaucrats at the PBIC.

    Most people don’t think about the myriad of government employees, union officials (and unofficial employees like Common Fund) that benefit from the massive overhead costs embedded in pension funds.

    But there are a lot of these shucksters, and they make serious campaign contributions / bribes to members of Congress

  • stevewright says:

    Check with Vanguard. I believe they already offer very cheap annuities with a DB. Remove the DB I’ll bet they’ll take the .2%

  • scm0330 says:

    David, I was going to echo the comment above…this sounds like the Fidelity low-cost annuity we use in my office. It was designed to strip assets from high-cost insurance company products. No surrender charges, no limitations on withdraws, solid menu of investment choices. (We are an independent RIA unaffiliated with Fido. We use them for custody.)