On average, to lock in a death benefit floor clients will pay 40 to 50 basis points annually or pay a higher surrender charge, or both. What that means is if a variable annuity does well and the market does not go down, the guaranteed minimum death benefit will never be realized, but clients will still have paid for it.
"I'm not opposed to guaranteed death benefits, but the prudent advisor will say, 'You already paid a lot of overhead cost for your existing annuity and you're halfway through a surrender charge'. Before I put you in a brand new surrender charge schedule, we better evaluate what your true life insurance needs are,'" says Olsen.
Sometimes, Olsen says, clients don't have any life insurance needs or their needs are met by other existing policies, which really negates using a guaranteed death benefit as a reason for doing an exchange.
Tax planning is also important when considering an exchange-and the justification for an annuity in the first place. Using annuities for legacy planning can raise nasty questions, since subaccounts passed on to heirs are always taxed as income. As for the Bush administration's reduction in taxes, most notably the reduction in the capital gains rate to 15%, proponents say it's had a negligible impact on the sale of variable annuities. "You're just not going to get the guaranteed income or death benefits in other products," Commonwealth's Maher says.