On Annuities, Particularly Variable Annuities

From a Reader:

I read your blog quite frequently and really enjoy the work you put into it.  It helps me to think about other opinions/concepts and always look at things in a different light.   I’m a financial advisor in St. Louis for a small boutique firm and truly feel your blog helps me be a better financial advisor.
Anyway, in trying to better myself and feel even more comfortable about recommendations I make for clients, I wanted to get your opinion on annuities.  In short, I used to avoid these things like the plague early in my career.  Now?  I find myself using them quite a bit for a portion of clients money and I find that in the planning process, they are a great tool in which to be able to tell clients exactly how much income they can expect in 5 or 10 years when they retire.  These riders and benefits are actually very useful in my opinion and have come a long way over the years.  I guess where I struggled in the past was during the 2008 crisis when my nice, neat 60/40 allocation for clients still lost them money…..sure, I was charging 1% and that’s cheap compared to the cost of an annuity but I can’t help but think how far ahead of the game clients would be if they had a portion in a product that guaranteed their income.  Of course, their account values might be down but their guaranteed income would still be intact.
So, with all that in mind and because of your background in the insurance business, I figured you might be the perfect person to fire away a few questions.
1) What’s your general opinion of guaranteed income riders?  Do you think they are worth it?  I know everything is relative to clients needs but from a pure practical standpoint, do you find that the benefit is still a good one?
2) What’s your opinion on contracts like with Jackson National or Metlife that offer a 5% guaranteed withdrawal AND a minimum death benefit combo of at least your initial contribution?  You have to leave $1 dollar left in the contract for the death benefit to pay but it seems to me to be an attractive option….guaranteed 5% w/d’s with assurance you can pass at least the initial premium on to your spouse or heirs
3) Lastly, what’s your take on this recent article?  Maybe for clients not wishing to pass money to heirs, this might be a good strategy?  Seems smart actually when they lay it out this way…..
I’m sure you are extremely busy.  I appreciate any feedback.  Sorry to ramble, just wanted to get my thoughts across.

When a Variable Annuity is popular, it is because the secondary benefit is underpriced.  Many life insurance companies sell such policies; that is one reason why I don’t invest in them.  The other reason is that GAAP accounting for life insurers is too liberal, particularly with guarantees on variable products.

There are many attractive benefits that have been offered in the past with variable annuities.  If an insurance company offers to buy you out of an annuity with such benefits, refuse them, unless you know better than they do that you will die soon.

There are some attractive benefits out there, and insurers that have underpriced the benefits.  Where you find attractive benefits, have clients invest in them.

Finally, if the living benefit is attractive, exercise the option.  Think in your own interests.  What will give you the best payoff?  At a time like this, where equity values are high, converting asset value into income could be a great idea.