Clients Want Insured Investments
In the wake of the last year's financial collapse, insurance guarantees are in huge demand. In a recent six-month period, 58% of advisors said their clients have inquired about guaranteed investments, according to an August survey by Financial Research Corp., Boston.

In addition, the Federal Reserve's Flow of Funds report in June indicated that households have been moving significantly more of their assets to safety, and the majority went to Treasury securities, CDs and interest-bearing deposits.

But because of the low interest rates on CDs and bonds, many advisors are turning to insurance products with higher returns and principal guarantees. One example is variable annuities, where total assets in June were $1.2 trillion, up 11% from the first quarter of 2009, according to LIMRA. And second-quarter data showed a record high 59% of contracts elected a guaranteed lifetime withdrawal benefit rider.

With a guaranteed minimum withdrawal benefit, investors typically are guaranteed 5% of the principal or stepped-up principal value-depending on how the contract is structured-as annual lifetime income regardless of how the underlying investments perform.

But a principal guarantee is only as good as the financial strength of the insurance company backing it. A number of insurance companies have received ratings downgrades by A.M. Best. Additionally, total annual costs for a variable annuity with a guaranteed minimum withdrawal benefit can hit 300 basis points. 

Immediate annuities and deferred fixed annuities are also finding a growing market thanks to guaranteed payout rates of 5% to 9%. Combined market sales in the first half of 2009 were $63 billion, according to Beacon Research. That's a 39% jump over the year-earlier period. "The severity of the current recession . . . reignited customer concerns about their principal's safety, renewing interest in fixed and indexed annuities," says Scott Hawkins, analyst at Conning Research. "At the same time, the baby boomer generation is shifting focus from asset accumulation towards asset decumulation."

Some advisors have access to a new hybrid product called "stand alone living benefits" (SALBs), which are guaranteed income riders that can be applied to fee-based advisors' managed accounts.

Tamiko Toland, an analyst with New York-based Strategic Insight, says the insurance portion of the product is a contingent deferred annuity certificate, registered with the Securities and Exchange Commission.

Clients also can arrange for income to continue for a spouse. But these products aren't cheap: The annual charge for a SALB ranges from 85 to 260 basis points.

Companies offering these riders include Phoenix Companies, Nationwide Financial, Allstate Life Insurance Co. and Genworth Financial. They are available on broker-dealer platforms such as Lockwood Management, Envestnet, Genworth Financial and Morgan Stanley Smith Barney.
SALBs may have limits on how much investors can allocate to stocks. Nationwide's "Retirement Income Solutions" limits the stock allocation to 50% of assets. By contrast, Phoenix permits a 100% allocation.

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