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Traditional insurance and annuity products are rapidly becoming a thing of the past. While many traditional products still have their uses, a relatively new breed of insurance products in the marketplace contain features and riders that make even their recent counterparts look like ideas from the dark ages. In other words, say goodbye to limited choices, market risk, inflexible payout options and separate policies for each kind of risk.

In this article, we'll show you how the new generation of variable life insurance and annuities leave their historic counterparts in the dust.

Tutorial: Introduction To Insurance

Changing Trend
This trend toward covering multiple risks marks the latest turn that insurance products have taken toward increasing flexibility and applicability for the insured.

In the beginning, annuities only provided a means to insure against outliving one's income. Life insurance was solely a means of providing for a family or estate upon the death of the insured. Then, of course, the insurance industry began offering variable products that invested in the stock and bond markets, and these quickly became the vehicles of choice for those seeking long-term growth.

Meanwhile, long-term care coverage was being touted as a necessity, but was still only available through separate policies. Furthermore, the investment choices within the variable policies often left much to be desired, with many contracts offering only a handful of proprietary funds or lesser-known fund company offerings. Payout options tended to be irrevocable; once annuitization began, the contract owner was often locked into that payment schedule for life.

The insurance industry recognized these shortcomings and slowly tried to remedy them, at least to some extent. Penalty-free withdrawals were made available within annuity contracts to facilitate liquidity for long-term care expenses, and systematic withdrawal plans were also offered as an alternative to annuitization. But simply having penalty-free access to one's money was not a strong alternative to having real long-term care coverage, and withdrawal plans do not provide any real protection against outliving one's income. (To read more about this, see Selecting The Payout On Your Annuity.)

Noteworthy Features
The insurance industry is evolving to meet the needs of the current market, which demands greater flexibility and multiple-use products that insure against more than one kind of risk. Revocable annuity payouts and sophisticated money management features are offered as well. On top of these features, living benefit options are now available to choose from in most contracts. (To learn more, read Variable Annuities: They're Not Just For Seniors.)

These features are worth examining in more detail.

1. Living Benefits
Living benefits have been around in one form or another for a few years now, but are becoming increasingly sophisticated. For a cost, riders are available that can not only guarantee the principal within a contract, but often a minimum rate of return as well. This feature can allow investors to reposition their assets within a contract to grow more aggressively, because they can count on the guaranteed minimum return if the markets do not perform accordingly.



Example - The Benefit of Riders
For a cost of 75 to 100 basis points, a contract might guarantee a 7% rate of growth in the portfolio through a rider. Therefore, the investor may be wise to invest the portfolio in a selection of fund choices that have historically outperformed the guaranteed rate, because any growth at or below the guarantee will not be realized. Then, if the market performs according to expectations, the investor can reap a higher rate of return; the guaranteed rate will function as a floor to land on if the markets turn bearish.

It should be noted that many of these riders do require some form of annuitization and usually cannot be paid out in a lump sum. (For more insight, see Let Life Insurance Riders Drive Your Coverage.)

2. Money Management Features
Money management options have been around for a while, but they are still invaluable to conservative investors seeking higher returns in the markets. Many contracts offer periodic portfolio rebalancing. This is done by maintaining the contract's original asset allocation where excess units of subaccount choices are sold and the resulting funds are repositioned into other subaccounts within the allocation model.



Example - Money Management With Dollar-Cost Averaging
Dollar-cost averaging
features are almost always available, and many companies offer special promotional fixed rates that they will pay to consumers for new money invested within a contract. For example, a company may offer a program for a limited time that stipulates that new customers purchasing a variable annuity can opt for a dollar-cost averaging program where they will begin by creating an asset allocation portfolio, but will put their initial investments entirely in the fixed account.
From there, the contract balance will be transferred from the fixed account into the allocated portfolio proportionately. The money that is in the fixed account will accrue a high rate of interest, often several percentage points higher than prevailing market rates. This feature effectively allows new investors to ease into the markets with a higher rate of interest at their backs. (For related reading, see Dollar-Cost Averaging Pays.)


3. LTC Riders
Long-term care riders may be the most exciting of any to be offered within modern variable products. For many consumers, there is a growing dilemma to be faced between paying for long-term care and saving for retirement. This relatively new feature allows for long-term care benefits to be paid from the life insurance death benefit.



Example - LTC Rider Benefits
For example, let\'s take a look at someone who has a $500,000 variable contract and lives in a nursing home for three years before death. If the total cost of the nursing home care for three years is $275,000, then the policy will pay the entire amount and reduce the death benefit accordingly, leaving the insured a final payout of $225,000 to his or her beneficiaries.
The advantage to this arrangement is that policy owners cannot lose any of the payout because they are guaranteed to receive the entire death benefit if no long-term care expenses are incurred. They can, of course, also receive the cash value as an income stream.

4. Pick What You Want
Finally, many carriers are further simplifying their contracts by unbundling all of the various features available and offering them individually within the contract. Previously, most carriers would offer the same contract with several different combinations of benefits, which was often confusing for customers to understand. Furthermore, many policy owners were forced to pay for benefits that they did not want or need in order to get other features they desired. This is no longer the norm. With variable annuities and insurance, consumers have the option to customize their future plans to their needs.

The Bottom Line
The insurance industry is growing and evolving to become more flexible and provide more choices to consumers. This includes developing products to insure against more than one kind of risk. In the past, variable annuities only protected against outliving one's income and life insurance only provided a death benefit for the insured's beneficiaries. Since then, offerings have expanded to include living benefits, money management features and long-term care riders, among others. Companies have also unbundled many of these features, allowing consumers to pick and choose the benefits they need to customize their insurance coverage.

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