A registered representative (RR) is approached by a client who expresses interest in purchasing a variable annuity. During the suitability assessment, the client discloses that they are 78 years old, have limited liquidity needs, and their primary objective is to leave a legacy for their grandchildren. The client has already maximized contributions to other retirement vehicles. Which aspect of the variable annuity might be most suitable for this client's stated objective?
- AThe immediate income stream options.
- BThe stepped-up death benefit feature.
- CThe potential for tax-deferred growth.
- DThe ability to withdraw funds without penalty after age 59 1/2.
Show answer & explanationAnswer & explanation
Correct answer: B. The stepped-up death benefit feature.
Given the client's age, limited liquidity needs, and primary objective of leaving a legacy, the stepped-up death benefit feature of a variable annuity is particularly relevant. This feature allows the death benefit to increase with market performance, ensuring a potentially larger payout to beneficiaries (grandchildren) upon the annuitant's death, without being subject to probate.
Why the other options are wrong
- A. Immediate income streams are for clients needing current income, which contradicts this client's stated limited liquidity needs and legacy objective.
- C. While a benefit, tax-deferred growth is less impactful for a 78-year-old with a legacy objective than the death benefit itself.
- D. The client states limited liquidity needs, so the ability to withdraw funds is not their primary driver. Also, variable annuities have surrender charges for early withdrawals, regardless of age.
Variable Annuity Stepped-Up Death Benefit
A feature in some variable annuities that guarantees the death benefit will be at least the greater of the contract's current cash value or the sum of premiums paid, adjusted for withdrawals, often 'stepped up' to the highest contract value on a specific anniversary date.
- Ensures a minimum payout to beneficiaries.
- Can increase the legacy value.
- Important for estate planning and wealth transfer.
Memory trick: Legacy's best friend: the stepped-up end.