Over the last 4 years I have been Director of Financial Services for a large CPA firm. CPA's are among the most cost-averse professionals, and their emphasis ofn tax issues makes them focus first on annuity taxability, then on costs, and so it's been an uphill battle to convince them to allow me to recommend variable annuities. Now the tide seems to be turning, not only inside our firm, but also in the professional literature. I have started seeing articles lauding the living benefits but musing as to whether the insurance companies are underpricing their risk (where it used to be over-pricing their products).

Until recently, I would have been very disinclined to recommend a variable annuity in an IRA, but now I am recommending some strongly, esepcially for the volatility averse client. What has changed for me is my attitude towards volatility, when gains can be locked in for purposes of future income. My habits (of asset allocation and rebalancing) to compress and manage volatility are so ingrained, that it has taken months of study of some guaranteed income benefit riders to accept that I might want to maximize volatility in a retirement investment. If the client can lock in the highest quarterly anniversary account value (for purposes of future income, the benefit base), for instance, why not select the most aggressive possible investments? Why not, if we don't care about the downside?

so here is one of my questions: Am I missing something? Let's take an extreme case and specific example: The Allianz Vision annuity with Lifetime Plus benefit claims to calculate the benefit base by locking in the highest quarterly anniversary value. If the account value went down every quarter instead of up, then the benefit base at the end of the first year would be the principal payments compounded by 5%. So why not choose the most aggressive investments? For instance, they allow Oppenheimer Developing Markets (but no more than 30%), and First Trust Target strategies. Combine those and you will get huge upsides. Yeah, huge downsides too, but who cares, when a high quarterly anniversary has been locked in for the benefit base? Even believing this, I have to push against my habit of diversification. What about you?

Has anyone out there run simulations of extreme conditions, like investing in the annuity and then the account value experiencing 3 years of losses every quarter, to see how long it would take for the account values to catch up to the benefit base? Does anyone reading this have particular preferences among the living benefits, and if so, why? What do you think of maximizing volatility in a VA with living benefits? I am just starting this journey.

 I just brought in a client that put $45,555 into an income-guarantee variable annuity five years ago.  It is out of surrender.  The money was put into a fairly aggressive (80% equity) portfolio.  The balance is $37,000.  The income guarantee is the sum of $63,100 to be paid out at $3155/year for 20 years.  The death benefit is the initial deposit of $45,555.  The client is not yet 591/2.  It is an IRA.  Sounds good?

That stream of income ($3155/yr for 20 years), discounted at 5%, has a present value of $39,318.  Discounted at 7%, it has a present value of $33,424.  In other words, she should be indifferent as to taking the $63,100 income guarantee or putting $33,424 into a balanced portfolio at a 7% growth rate for 20 years.  Plus, she would have to delay the 20yr income stream until she is 591/2 or pay a 10% penalty.  If not for the death benefit, she would be better off taking the $37,000 out and passing on the $63,100 income guarantee - particularly with the market where it is.