Morningstar - Q3 2023 - 45

Strategies
EXHIBIT 2
Certain FIAs Pay Off The most generous FIAs may provide richer benefits than
other annuities.
Average Funded Ratio in Shortfall Scenarios and Median Bequest by Strategy-FIA With GLWB With
Richer Guarantees, VA With GLWB, DIA, and SPIA
Strategy
Portfolio Only
Portfolio + DIA
Portfolio + SPIA1
Portfolio + FIA With
Level-Income GLWB
(Baseline)
Portfolio + FIA With
Level-Income GLWB
(10% Simple Interest)
Portfolio + FIA With
Rising-Income GLWB
(Baseline)
Portfolio + FIA With
Rising-Income GLWB
(Payout Rate of 4.45%)
FIA Base Contract
Pricing Spread
N/A
N/A
N/A
Portfolio + VA With GLWB N/A
Constant
Increase by 0.25%
Increase by 0.75%
Constant
Increase by 0.25%
Increase by 0.75%
Constant
Increase by 0.25%
Increase by 0.75%
Constant
Increase by 0.25%
Increase by 0.75%
Average Funded
Ratio in Worst
100 Scenarios (%)
84.10
86.87
87.55
86.22
86.75
86.73
86.73
88.68
88.69
88.69
86.44
86.00
84.63
87.45
86.99
85.51
Difference
Against Portfolio
Only (%)
2.77
3.45
2.12
2.65
2.63
2.63
4.58
4.59
4.59
2.34
1.90
0.53
3.35
2.89
1.41
Median Real
Bequest ($)
1,475,688
1,529,632
1,608,716
1,453,049
1,518,378
1,509,372
1,469,694
1,618,969
1,608,768
1,606,159
1,582,505
1,533,595
1,404,394
1,678,863
1,624,177
1,482,320
% Difference
Against
Portfolio Only
3.66
9.01
-1.53
2.89
2.28
-0.41
9.71
9.02
8.84
7.24
3.92
-4.83
13.77
10.06
0.45
1 The fixed SPIA does not outperform the more generous FIA with GLWBs because in the shortfall scenarios, there tends to be poor market performance in
the years leading up to retirement. This reduces the level of wealth used to buy a SPIA.
Source: Morningstar. We assume a 40% product allocation for all annuity-based strategies. We only ran the three product pricing spreads for sake of
brevity. Refer to the full study for more detail.
richer version of the rising-income GLWB produced
the largest bequest of all our runs when the base
contract pricing spread stayed constant, and it
performed well in the scenario in which the pricing
spread increased by 0.25%. It lagged other
strategies when the pricing spread increased by
0.75%, but this pricing-spread scenario is less
likely than others. We also found that the SPIA and
DIA strategies provided richer income benefits
than the baseline FIA with GWLB variations, but
the VA with GLWB did not.
This finding is predicated on our sample consumer
buying the FIA with GLWB at age 55 and deferring
guaranteed withdrawals for 10 years. This is an
important assumption as the longer deferral period
gives the benefit base-again, a hypothetical
value that is only used to calculate the guaranteed
withdrawal benefit itself-time to grow, which
substantially boosts the level of guaranteed
income. That said, we want to emphasize that the
number of years that consumers should defer
income depends on the age at which they
purchased the product. Longer waiting periods
may not be optimal if consumers purchase the
product when they are older. In any case, while
it ultimately comes down to specific circumstances
and the product details, consumers can likely
get richer benefits from income annuities if income
is needed relatively soon.
advisors and investors carefully evaluate the
features of a specific product.
Finding Two: The Most Generous FIAs With a
GLWB Could Provide Richer Benefits Than Other
Annuities if Consumers Wait to Take Income
After analyzing real-world products available today,
we created two additional FIA with GLWB
variations-one with the level-income design and
one with the rising-income design-with more
generous features than our baseline composites.
We generated results over a range of pricing
spreads and compared these variations against a
strategy based on a deferred-income annuity, or
DIA; a strategy based on a single-premium
immediate annuity, or SPIA; and a variable annuity
with GLWB strategy. We also included the
portfolio-only and the baseline FIA with GLWB
results in the analysis.
Overall, we found that the most generous FIAs
may provide richer benefits than other annuities
( EXHIBIT 2 ). The richer version of the level-income
GLWB especially stood out, as it outperformed
the other annuity-based strategies in terms of both
shortfalls and bequests in most cases. The
The results indicate that FIAs with the richest
guaranteed withdrawal benefits can
outperform the other annuity-based strategies.
Prospective FIA with GLWB buyers should compare
products to find those offering the richest
guarantees. This is a similar finding to that of
Toland and others (2018).2
The main reason the FIA with a GLWB provided
a higher average funded ratio than the VA
with a GLWB is the product chassis, as we used a
VA design that had similar total costs as the
level-income FIA with a GLWB. With FIAs,
the contract value cannot decrease due to market
performance. However, with VAs, the insurer
has less control over the evolution of the
underlying contract value as it fluctuates with
2 Toland, T., Nikolic, B., & Dabrowski, S. 2018. " Guaranteed Income Across Annuity Products: Withdrawal Guarantees Compete With Income Annuities. " CANNEX.com. October.
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