Structured Variable Annuity
Structured Variable Annuities (SVAs) are tax-deferred insurance vehicles that provide upside potential with a defined degree of downside protection. The investor assumes the portion of the market risk that is in excess of the "buffer" or the initial losses before reaching the "floor", but in exchange receives a higher participation rate in market performance.
Structured Variable Annuities (SVAs) were first introduced by AXA (now Equitable) in 2010, and are now offered by multiple carriers. In 2020, sales of Structured Variable Annuities increased 38% ($4.8B) between Q1 and Q2, more than any other annuity product type. Concerns about equity market volatility may be one of the key factors contributing to this significant increase in SVA sales.
These measures are created within the context of insurance products.
How They Work
SVAs can be thought of as a hybrid between indexed and variable annuities, as most of a client’s premium is allocated to fixed income instruments, while a small portion is allocated to other derivative investments. Because of the unique nature of investing a portion of the assets into derivative instruments, the insurance company is often able to generate higher yields, allowing for higher cap rates and, thus, providing the potential for greater returns to the client.
Depending on the product structure, SVAs may offer a buffer or floor option, where the insurance company either covers a specific percentage of the market downside (buffer) or the insurance company caps a specific percentage of market downside (floor). For example, if the market were to fall 15% and the product has a 5% buffer feature, the client would lose 10%, as the insurance company covers the first 5%. If the product has a 5% floor option, the client’s losses would be capped at 5%, and the insurance company would take on the rest of the 10% loss.
Problems with Commissioned SVAs
How to Think About Commission-Free Structured Variable Annuities
Structured Variable Annuities fall in the middle of variable annuities and fixed indexed annuities in terms of risk tolerance. Investors may utilize SVAs as an equity allocation replacement to capture upside while reducing portfolio risk, as these products often provide cushion against major market losses.
When your client needs:
PRINCIPAL PROTECTION: Structured variable annuities are typically used for clients nearing retirement. They offer a level of protection against sequence of returns risk, while also providing the potential for higher returns due to higher cap rates than other structured insurance vehicles.
EQUITY REPLACEMENT: Structured variable annuities can be utilized to de-risk portfolios from large equity allocations, while still providing market exposure.
Have more questions about our Structured Variable Annuity options?
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