Skip Navigation

January 19, 2012, Cover Stories, Annuities

About those Embedded Derivatives

By Kerry Pechter   Tue, Dec 20, 2011

The variable annuity with a lifetime income benefit--sometimes known as an exotic put option or an embedded derivative--was a product that has come back to bite many of the companies that sold it. Was this product ever the best solution for the Boomer retirement challenge?

The final week of 2011 seems like a suitable moment to ask if the life insurance industry’s romance with variable annuities with lifetime income riders has been, on the whole, a net positive or a net negative experience.

The industry’s lobbyists insist that VAs currently enjoy the best of times. Indeed, sales rebounded in 2011, as more Boomers entered the so-called retirement red zone and sought what VA riders advertise: downside protection with upside potential. 

But so many VA issuers either exited the business in 2011, or curtailed distribution, or announced charges against earnings, or failed to recover enough of their acquisition costs (“DAC unlocking”) or reduced their benefits, that it might be described as the worst of times.

It seems reasonable to ask if the GLWB concept was a regrettable experiment in financial engineering, a good idea overzealously sold, a transitional product paving the way for something more sustainable—or perhaps a great idea that fell victim to a Black Swan market?  

We look forward to sharing this valuable article with you! Subscribers may Log In below.

For group discounts, licensing, and reprints, contact kerry.pechter@retirementincomejournal.com.

 

 

Forget your subscriber password? It's easy to reset here: Reset your password.