7. Though many FIAs have additional policy components that increase the complexity of the product, such as nursing home care benefit, and the potential growth of account value according to certain investment index options, these components do not serve to affect the lifetime income benefit that is fixed at the outset of the policy and is guaranteed, as long as the lifetime income provision is included in the policy as the prototype FIA in this paper.
8. Since annuity costs are difficult to ascertain, looking to the benefits offered seems to be a better way for assessing the value of an annuity because they are readily ascertainable.
9. The data in this paper also suggest that it is beneficial to plan for retirement income earlier rather than later, as the cost for secure, guaranteed income may be lower than it would be otherwise.
V. Conclusion
The common belief that FIAs are more costly than DIAs and SPIAs has not borne out in a comparative study of the income benefits of these annuities. While DIAs and SPIAs have low sales commissions and no surrender charges, they are not necessarily cheaper products as they in fact offer lower benefits, given the same investment. Conversely, FIAs offer higher benefits despite the fact that they may entail surrender charges and high sales costs.
It is therefore critical for advisors to understand the true benefit of each type of annuity by going beyond the issue of cost. Relying on common beliefs in dealing with the income needs of clients may be detrimental to their interests if such common beliefs turn out to be invalid.
Eva L. Levine, J.D., CFP, RIA, is the principal of Plenaris Advisory, based in San Jose, Calif. The firm offers comprehensive financial planning in the San Francisco Bay Area.