Variable Annuities: Are They Now Too Cheap?

Variable Annuities: Are They Now Too Cheap?

I was never a big fan of Variable Annuities until a few years ago when I learned of the relatively new "living benefits" that had become available. Having led teams that built financial products in the past, I readily recognized the value of these new benefits - and I quickly became an advocate.

Not everyone has my background, but it still surprises me that so many financial professionals - and particularly those in the media - continue to proclaim variable annuities are a poor, high cost investment choice. But I'm slowly beginning to see this change.

A recent article published by Research Magazine entitled, "Confessions of a VA Critic" was written by Moshe A. Milevsky, PhD. Dr. Milevsky is a finance professor at the Schulilch School of Business at York University. In this article, Dr. Milevsky discusses his latest research study which applied to the "living benefits" now available with some variable annuities.

Before detailing this article, it should be noted that Dr. Milevsky, along with Dr. Steven Posner, conducted and published a research study in the mid 1990s. That prior study essentially concluded the typical VA policyholder was being grossly overcharged because the equivalent benefits could be achieved at less cost through other means. That research was arguably the basis for the bulk of criticism of Variable Annuities to date.

The results of Dr. Milevsky's newest research, as outlined in the Research Magazine article, are quite different. In reference to variable annuities with "living benefits," Dr. Milevsky states in his article, "the relative value pendulum has swung in the opposite direction. I can no longer declare that investors are being overcharged." He goes on to explain that the options exchange is the only other place to buy similar protection and it "often charges five to ten times" the cost of VA living benefits.

Dr. Milevsky's concern now is that VA's may not be charging enough for these benefits, and that care be taken in choosing a provider that will be able to financially support their guarantees.