A registered representative is approached by a client who wants to purchase a variable annuity. The client is 58 years old, has a moderate risk tolerance, and is seeking growth potential for retirement, but also needs access to funds for potential long-term care needs in the next 5-7 years. Which feature of a variable annuity would be most important to consider for this client's situation?
- AA death benefit rider with a stepped-up value.
- BA low surrender charge period or a penalty-free withdrawal feature.
- CA guaranteed minimum withdrawal benefit (GMWB) rider.
- DAggressive sub-account options for maximum growth.
Show answer & explanationAnswer & explanation
Correct answer: B. A low surrender charge period or a penalty-free withdrawal feature.
Given the client's potential need for access to funds for long-term care within 5-7 years, the most critical feature to consider is the liquidity of the variable annuity. A low surrender charge period or a penalty-free withdrawal feature (often 10% annually) would allow the client to access a portion of their funds without significant penalties, aligning with their stated liquidity needs.
Why the other options are wrong
- A. A death benefit rider is for beneficiaries upon the client's death and does not help with the client's own living long-term care needs.
- C. A GMWB rider ensures a certain income stream in retirement but doesn't specifically address the need for a lump sum for long-term care before annuitization.
- D. Aggressive sub-accounts might not align with a moderate risk tolerance and don't address liquidity.
Variable Annuity Liquidity
Variable annuities are generally long-term investments, but some offer features like penalty-free withdrawals or shorter surrender charge periods that provide limited liquidity.
- Surrender charges typically apply for a set period (e.g., 7-10 years).
- Most annuities allow penalty-free withdrawals of up to 10% of the account value annually.
- Withdrawals before age 59½ may incur a 10% IRS tax penalty, in addition to ordinary income tax.
Memory trick: Variable annuities have many parts, but client's cash needs must capture your heart.