What follows are case studies that illustrate the seriousness of the issue.

Case Study 1
Take, as an example, a 55-year-old man who invests \$500,000 in a variable annuity. He has been assured of a guaranteed withdrawal benefit-an income-for-life stream and a death benefit. The illustration also assumes the investor will start to take withdrawals in year six. The market goes nowhere and the gross hypothetical return is 0%. He starts to take \$35,064 a year, and at the end of 10 years he has taken \$350,064. The investor dies at the end of 10 years. His family receives nothing. The investor invested \$500,000 and he has withdrawn \$350,064, a "loss" of approximately \$150,000 at death.

Case Study 2
Now let's assume we're working with the same investor under the same conditions as before. Again, he has been assured of a guaranteed income for life with the standard death benefit. Let's say the investments perform well in the first three years. But in the fourth and fifth years, the market declines. The investor now starts taking the withdrawal benefit of \$35,064, since he has been assured of the income for life as in case study No. 1. During the 17 years he was in the contract, 70% of the time the market did well, returning 10% a year during the "up" years, while in the 30% of the time it did not do well, it returned negative 10% a year. He has withdrawn \$455,832. If death occurs in the 18th year, again he or his family has a loss of approximately \$45,000.

Case Study 3
Let's again assume that same investor puts in \$500,000. Again he has been assured of a guaranteed withdrawal benefit and a guaranteed death benefit. He invests in the product because of the concerns that the market will not do well during the long haul.  Because of bad investment decisions, aggressive investments, bad timing, etc., his returns are a negative 10% for 10 years. As he has been assured of the guaranteed income stream and the death benefit, he starts withdrawals of \$35,064 a year and in year 10 he dies, leaving the family nothing. He invested \$500,000 and his withdrawals, over five years, totaled \$175,320, a loss to his family of \$324,680.

(In all of these cases, the total costs were estimated to be 1.5% for the M&E and 0.15% per year for the asset charge. Add these to the sub-account charge of 1.088% and the GWB charge 0.60%, and the total is 3.33% annually.)

There are additional dangers in these examples that advisors or representatives should be aware of. In those products with the GWB, the investor and spouse would stand to gain if death occurred after the breakeven period (the number of years-withdrawals-it takes for the investor to recover his initial investment). Therefore, one should be cautious in recommending this benefit to unmarried individuals and investors who are older and planning to take withdrawals in later years (for example, from ages 75 to 80).

Solutions
So, what initiatives should different groups take to approach these annuity problems?

1. The leading annuity companies should modify their calculation of the death benefit to a dollar-for-dollar basis for withdrawals up to at least the guaranteed withdrawal benefit amount. It would clearly be in their long-term interest. They would also gain a competitive advantage, as there are few companies at present-AXA and Hartford-doing so.

2. There should also be additional regulation and disclosure rules from FINRA and the state legislatures. Companies should be either required to go to the dollar-for-dollar death benefit calculation or provide additional illustrations showing the death benefit with a negative return, or at least a 0% return, as well as illustrations indicating the risk of GWB withdrawals on the death benefit. (Many companies that I talked to said their software would not allow a negative return calculation. One company could not even run a hypothetical 0% calculation.)

3. As fiduciaries, advisors and representatives should voluntarily disclose the loss of death benefits with GWB withdrawals and negative returns. In the current competitive atmosphere, however, many advisors would likely be reluctant to do this.

If no remedial action is taken by the companies, the regulators or the advisors, a clear and persistent danger will continue for not only investors, but also for their advisors and the insurance companies. In my opinion, in a rising market, there is no need for the benefit nor is there a need to pay the costs associated with it. In a declining market, as investors withdraw money through the GWB benefit, the carpet is just waiting to be pulled out from under the investor's beneficiaries, which could lead to a rising slew of class action lawsuits in the future. It may be déjà vu all over again if anyone cares to remember the "vanishing premium" cases of yesteryear.

Jay Kabad, CFP, is president of Jaykay Wealth Advisors Inc. in Houston. He is also a registered representative with ING Financial Partners Inc.

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