Both advisers and insurers believe that variable annuities with guaranteed benefit riders are the most complicated annuity products. Certain aspects of these annuity contracts can lead to misconceptions among advisers regarding how the products work and among customers regarding what they are purchasing.

“A lot of the people selling these products simply don’t fully understand it. And why don’t they? Because they’re so darn complex,” said Jim Shambo, president of Lifetime Planning Concepts. “I’ve never met a client who understands them, and I’ve never met a salesmen who fully understands them.”

Variable annuities with guaranteed benefit riders offer consumers an income floor in the event markets perform poorly and allow for upside participation during up markets.

Guaranteed lifetime withdrawal benefits (“GLWBs”) are the most popular living benefit rider in variable annuity contracts, comprising over eighty percent of variable annuity sales in 2014.

Shambo believes that one of the biggest reasons for adviser and customer confusion is a “two-bucket” concept. One bucket represents the income base guaranteed by the contract, such as a five percent annual withdrawal rate for life. The second bucket represents the actual account value, the underlying invested principal.

This account value bucket is affected by market gains and losses and contract costs. Investors often fail to understand that this is the only account they have access to if they need to liquidate the annuity contract and tap their money.

According to the LIMRA Secure Retirement Institute, surrender rates for contracts with a GLWB are lower than those for other annuity products. Rates were three percent for contracts with a GLWB issued before 2013. For those with a guaranteed minimum income benefit, the second most popular variable annuity rider, the rate was 3.9%.

Investors routinely mix up the features and nuances of the income base versus their account value, causing the majority of future issues, says Judson Forner, director of investment marketing at ValMark Securities.

Forner states, “The most important distinction you need to make when selling these products is there’s a very different relationship for the client between the account value and their income base. Oftentimes clients don’t fully grasp it or advisers don’t fully explain it.”

Flexibility built into these contracts also offers the ability for customers to withdraw in excess of the allowable withdrawal amount. In these instances, the income base is reduced “in nearly all cases,” and the annual withdrawals would be lower than they were previously, according to Forner.

The use and recommendation of variable annuities with customers dropped by three percent to 38% of advisers over 2014-2015, according to a joint Financial Planning Association-Journal of Financial Planning survey.

“If you want to broaden the tent of the annuity business, then you need to improve the simplification of these products [for advisers],” said Bill Lowe, president of Sammons Retirement Solutions, adding that more straightforward riders would help.

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