Envestnet Whitepapers

Annuities as an Asset Class for Fee-Based Advisors l 37 © Envestnet 2022 In theory, simple income annuities should offer the highest guaranteed payout rates. Their simple design lacks any special features like liquidity and upside potential that require additional cost. The income annuity can offer the most downside protection but no upside potential. Even though that downside benefit may be less, an important selling point of deferred annuities is that they potentially provide more than just a minimum guaranteed withdrawal benefit. More generally, fixed annuities should offer higher guaranteed withdrawals than variable annuities because fixed annuities do not need to manage market risk in addition to longevity risk. With principal protection, the worst-case scenarios for fixed annuities can be known. FIAs will fall in between income annuities and variable annuities both in terms of their downside protections and upside potential. Variable annuities will require the greatest costs to provide protection, since they also manage market risk, and this will generally lead them to offer the least downside protection in terms of guaranteed lifetime withdrawal benefits. But competitive variable annuities will provide the most upside potential, especially with lower costs, higher quality investment choices, and investment freedom to choose an aggressive asset allocation. Generally, as just described, accepting less upside potential allows for the possibility of more robust downside protections. But there can be exceptions. FIAs can occasionally have higher guaranteed payout rates than income annuities, as deferred annuities provide discretion to owners to make irrational decisions. Not everyone takes advantage of distributing the full allowed guaranteed amounts from deferred annuities, which reduces the odds for the contract value to deplete and eases pressure on the insurer. Through competition, this can lead to a higher payout rate on the living benefit for an FIA. There can also occasionally be exceptions in which variable annuities can offer comparable guarantees to fixed annuities, particularly in cases where the VA may have very limited bond subaccount options for investments that lead to less downside risk. Indeed, the type of annuity offering the most guaranteed income can vary depending on household characteristics, the length of deferral, and potential future changes in pricing and product offerings. Shopping around between different types of annuities to obtain the best deal available at any given moment is a worthwhile endeavor. Shopping around between different types of annuities to obtain the best deal available at any given moment is a worthwhile endeavor.

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