Variable Annuities v. Fixed Indexed Annuities: A Quest to Maximize Guaranteed Future Lifetime Income and Return on Premium

Open Access
Author:
Koenig, Timothy Michael
Area of Honors:
Actuarial Science
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Ron Gebhardtsbauer, Thesis Supervisor
  • Ron Gebhardtsbauer, Honors Advisor
  • Zhongyi Yuan, Faculty Reader
Keywords:
  • actuarial science
  • variable annuities
  • fixed indexed annuities
  • future income
  • investment
  • retirement
Abstract:
As the emphasis on personal saving for retirement continues to grow, so too has the interest in buying an annuity product with upside potential. A product with upside potential suggests that if the market were to rise, the value of this annuity would increase rather than remain constant. In this study, we consider three deferred annuity products that offer this upside potential: a variable annuity, a fixed indexed annuity with a cap rate and a fixed indexed annuity with a participation rate. First, we consider stochastically projected payouts of the simple, vanilla versions of these three products, assuming a ten year period of premium accumulation followed by an annuitization of the accumulated premium. We then proceed to add a ratchet, roll-up and guaranteed lifetime withdrawal benefit rider to these three products. We again accumulate these premiums for ten years, but because this rider package provides guaranteed income, we then proceed to consider income withdrawals from the account rather than annuitizing the accumulated value. As we compare the results of these projections and resulting payments, we assume our consumer expects these products to ensure lifetime future income. This is the assumption that prompts us to annuitize the vanilla products after ten years. Despite this expectation, we also still consider the ability of each product to maximize the return on initial invested premium. We ultimately conclude that a rider package consistently generates greater future income for the consumer than a product’s vanilla counterpart. Within this rider family, we note that the variable annuity generates equal or greater future income than the competing fixed indexed annuities. Finally, we recognize that a vanilla variable annuity offers the greatest potential return for a consumer willing to absorb high risk, while a vanilla fixed indexed annuity best secures initially invested premium, thus lowering both accumulated account value volatility and potential upside return of premium.