Manulife IncomePlus Product?

[ghariton]

There are some newsletters which may be of interest here:

http://www.qwema.ca/index.php/newsletters/

See, in particular, What is a Guaranteed Lifetime Income Benefit Really Worth? and the article on the probability of a GLiB re-set

Thank you for the link.

I noticed that the model used in the article uses a discount factor of 4.0% (nominal) in valuing annuities. According to the Bank of Canada, the benchmark long term bond rate for Gov't of Canada bonds in October 2010 (when the article was published) was 3.5%. In fact it has been around that level for over a year now.

I was under the impression that designers of annuities used the long-term government bond rate. Was I wrong? How was the 4.0% discount rate chosen?

Thank you in advance.

George

[Flights of Fancy]

The audience for those newsletters is North American-wide, hence it does not rely on Canadian rates. Also, for what it's worth, users of the tools identified in the newsletters can set the rates as they choose.

[ghariton]

The audience for those newsletters is North American-wide, hence it does not rely on Canadian rates.

That would explain it. Long U.S. Treasuries have been closer to 4%.

Also, for what it's worth, users of the tools identified in the newsletters can set the rates as they choose.

Yes, I understood that. I was just puzzled by the rate in the illustrative example.

Thank you.

George

[albertafp]

As an advisor, the GLWB products are not something of which I am particularly fond. However in certain situations they are a viable alternative. To get back to the original question, I believe that iluvnascar was asking about the transfer from a DB Pension plan to Income plus. One major caveat which hasn't been mentioned is that since the funds are coming from a DB Pension plan they would need to be transferred to a LIRA (or similar). The 5% bonus allocated per year is a notional bonus, not actual cash. This notional bonus is not recognized when calculating year end values of a an LRIF. So in the income drawing years, especially if the markets go down for a while, the bonus is irrelevant and the annuitant can receive much less income than they expected. For this reason a LIRA is an inappropriate vehicle for a GLWB product (in my opinion).


This comment is worth everything you paid for it

[northbeach]

As an advisor, the GLWB products are not something of which I am particularly fond. However in certain situations they are a viable alternative. To get back to the original question, I believe that iluvnascar was asking about the transfer from a DB Pension plan to Income plus. One major caveat which hasn't been mentioned is that since the funds are coming from a DB Pension plan they would need to be transferred to a LIRA (or similar). The 5% bonus allocated per year is a notional bonus, not actual cash. This notional bonus is not recognized when calculating year end values of a an LRIF. So in the income drawing years, especially if the markets go down for a while, the bonus is irrelevant and the annuitant can receive much less income than they expected. For this reason a LIRA is an inappropriate vehicle for a GLWB product (in my opinion).
This comment is worth everything you paid for it

What are the situations you would recommend a GLWB?
I recommended the SunLife product for my SIL who is nearing 60 and will obviously benefit from the 5% bonus especially if she can collect it till 70 before withdrawing funds. She is risk averse and is not in the position to accept a declining or flat market.

[albertafp]

It really comes down more to personality and risk tolerance. Exactly as you say, if the investor is risk averse and is in that near retirement window, then a GLWB should definitely be discussed. I do make sure to point out the higher MER's and the GLWB fee, but for some clients the peace of mind is worth it for them.
Another situation where I have found them advantageous is in a RRIF situation. Since the GLWB provides either a 5% guaranteed payout or the RRIF minimum (whichever is higher) this can also work to a client's advantage. The GLWB works as a guaranteed minimum payout, and the client gets to take advantage of the higher RRIF minimum payouts (eg at 71 RRIF minimum is 7.38%) as long as possible.

These comment are always worth exactly what you paid for them

[Flights of Fancy]

What are the situations you would recommend a GLWB?

In situations where the annuitant wants guaranteed income but is unwilling to take the one-way street of a SPIA purchase. (Not that anyone asked me.) Retaining liquidity is, I think, an underappreciated element of the GWMB product silo. The SPIA will always be cheaper than the GMWB for the same amount of income, but the loss of liquidity with a SPIA apparently presents an unacceptable hurdle for a lot of retirees.