Variable life and annuities are a dying business.
They’re so dying that companies like Ohio National decide to renege on asset fees and trailing commissions to advisors.
Meaning, life insurance agents, financial planners, and financial consultants who sold these products years and years ago have suddenly lost a substantial portion of their income.
At least 2 advisors have come forth to sue the company because they’re losing between $50,000 and $80,000 per year in income.
Anywho, even insurance companies who haven’t welched on their promises to advisors have scaled way back on promises to policyholders.
Here’s what I mean:
One of the things that insurance companies used to do with these products is guarantee a rate of return so long as the policyholder didn’t touch the savings balance for at least 10 years.
This is a very big deal because variable annuities and variable life insurance cash values are invested in the stock market.
The going rate for these policies used to be 7%. Then, it dropped to 6%. When I worked for a publicly-traded brokerage firm, we used to guarantee 7% annual return on variable annuities… this was back in 2004ish.
Imagine, a 7% guaranteed return on your savings…
But… those promises turned out to be way too expensive to insure.
Let that sink in for a moment and… keep that in mind next time someone tells you how easy it is to earn 8% in the stock market.
But, there’s more to this than just the returns.
If you happen to buy into the idea that life insurance and annuities are designed to transfer risk away from you and onto the insurer (which I do), then variable products don’t make a heck of a lot of sense.
Don’t get me wrong. They do technically fit the definition of insurance. They do replace loss when the policyholder dies. They also guarantee against loss to some extent (assuming the minimum accumulation benefit rider is in effect). They do shift *some* risk to the insurer, but… these products are explicitly designed to share investment risk between the life insurance company and the policyholder.
At some point, the guaranteed period ends and you’re on your own.
That’s a tall order for most people. And folks who are good enough to do their own investing, they are probably better off investing elsewhere since they pay both investing fees and also insurance fees.
In my career, I’ve seen a couple examples where this strategy might workout OK, but those were variable whole life policies which had a basic level of guaranteed cash value and also non guaranteed cash value tied to mutual funds.
You could still lose money in the contract, and it wasn’t as stable as dividend paying whole life, so planning for the future still hinged largely on the future net asset value of those mutual funds.
Anyway, variable products have sort of fallen out of favor with… well… most people.
An, in my not-so-humble opinion, it’s probably for the best.
If you want stock market-like returns, invest in the stock market.
If you can’t afford to lose any of your savings, buy whole life insurance or fixed annuities.
And if you are just starting out and want to protect your future, start out by buying lots of insurance, and invest what you can afford to lose.
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