Independent Review of the Prudential Defined Income Variable Annuity

May 28, 2013 — 2 Comments

What’s Covered in this Prudential Defined Income Annuity Review?

In today’s review, I’ll be covering the following information on the Prudential Defined Income Variable Annuity:

  • Product type
  • Fees
  • Current rates
  • Realistic long term investment expectations
  • How it is best used
  • How it is most poorly used

The Defined Income Annuity does a few things really well compared to other variable annuities, but there are certainly limitations. There are also details some agents might say about its performance that are not entirely true.  It’s important you understand the differences (between what advisors say, and how the product really works), so you can determine if it really is a good fit as part of your financial plan.

Annuities can be complex.  That's where having an Annuity Investigator who loves math comes in.  We make the complex, simple.

Annuities can be complex. That’s where having an Annuity Investigator who loves math comes in. We make the complex, simple.

Annuity and Retirement Income Planning Education You Can Actually Trust

For readers who have found this website for the first time and don’t know much about me, I am a fee only financial planner and supremely proud math geek. I don’t get paid to sell annuities, nor do I personally sell annuities.

Unlike other fee only planners though, I do think annuities can be a smart part of a comprehensive financial plan when used correctly.

When using the internet to get annuity education and info, what you’ll find is that most of the websites are run by annuity agents. They might appear (certainly trying their hardest) to look like unbiased educators, but you can rest assured their #1 motivation is to actually sell you an annuity. Others are adamantly opposed to annuities, but have no idea how they really work.

Both of those approaches are flawed, and don’t benefit you in any way.

The site you’re on today is totally different, and from a compensation perspective, doesn’t benefit more or less whether or not you actually use annuities. AnnuityGator.com publishes the most comprehensive independent annuity reviews on the web, and has been doing so longer than any of the (now many) copycat sites out there.

Let’s dig in!

Prudential Defined Income Variable Annuity at a Glance

Product NameDefined Income Variable Annuity
IssuerPrudential Financial Inc
Type of ProductVariable Annuity
Standard & Poor's Rating"AA-" (Very Strong)
Phone Number888-778-2888
Websitewww.Annuities.Prudential.com

Opening Thoughts on the Prudential Defined Income Annuity

"So is this annuity good or bad?" - Read on to find out!

“So is this annuity good or bad?” – Read on to find out!

Over the past 10 years variable annuity sales have been booming, but declining a touch the past couple. One of the reasons sales have largely been up though, is due to “living benefit riders.” Living benefit riders are additional features of an annuity that guarantee a benefit to the contract owner while they are living.

One of the popular living benefit riders is a Guaranteed Lifetime Withdraw Benefit (GLWB).  The GLWB essentially guarantees a lifetime income for the contract owner regardless of how long the owner lives or what the market does. Even if the underlying investments go to zero, the GLWB keeps on paying income.

This has been really popular largely because of the volatility of the stock market, and also because low interest rates have made it tough to find high paying fixed investment alternatives.

The problem though, is many of the insurance companies that offered first generation GLWB riders are now exiting the business. It turns out the income guarantees cost too much money and put the insurance companies in too much risk. So over the past couple years the riders have changed greatly. Insurance companies still want to pull in piles of investor deposits (so they have to look desirable), but don’t want to do so at the risk of not being able to make good on the guarantees.

Prudential has stepped up pretty big with the Defined Income Annuity, because it truly has some of the best guaranteed income payouts compared to other variable annuity competitors. It does so by being the first Variable Annuity with a GLWB to offer just a single “variable” investment option. This investment option is the AST Long Duration Bond Portfolio.

By only offering a bond portfolio, the risk to Prudential is much smaller than if they offered growth or balanced investment options. This is because they only have to pay the guaranteed income if the bond portfolio can’t produce the income on it’s own. When you compare this to the risk of, say, offering a stock portfolio option; it’s much smaller. A stock portfolio might drop 50%. If that were to happen, the insurance company could be on the hook for a substantial amount of guaranteed income payments because the “variable” component is not capable of providing the income by itself.

It’s not all roses, however. Just because the income guarantee is higher than other variable annuity competitors, doesn’t mean it’s the best income guarantee available. By only allowing bond investments, this variable annuity actually has performance much closer to Fixed Index Annuities with GLWB riders. Many of those actually pay higher income guarantees.

You’ll see why later in this review, most specifically in the 45 minute video we created that shows exactly how it really works. In the video I illustrate how to calculate the real returns of the income guarantee, as well as provide some insight into what the return potential is of the AST Long Duration Bond Portfolio.

If you’re wondering if this annuity is right for you, or if you have questions and need a little help getting pointed in the right direction; just reach out via our secure contact for here.

Before we get into the gritty details, here are some legal disclosures…

This is an independent product review, not a recommendation to buy or sell an annuity.  Prudential Financial has not endorsed this review in any way nor do I receive any compensation for this review.  This review is meant to be an independent review at the request of readers so they could see my perspective when breaking down the positives and negatives of this particular model annuity.  Before purchasing any investment product be sure to do your own due diligence and consult a properly licensed professional should you have specific questions as they relate to your individual circumstances.  All names, marks, and materials used for this review are property of their respective owners.

How Prudential Financial Describes The Defined Income Annuity

Prudential Defined Income Annuity surrender schedule and contract fees. Just click on the image to make it larger and easier to read.

Prudential Defined Income Annuity surrender schedule and contract fees. Just click on the image to make it larger and easier to read.

Per the Defined Income Annuity website and brochure, here are some key points as to how it’s marketed:

  • Simplifies retirement income planning
  • Avoids exposure to equity markets
  • A potential alternative to money in cash, money markets, or CDs
  • The longer you wait, the more income you can get
  • Flexible income options, including lifetime income

There’s a few more bells and whistles, but those are the basics.  If you’re looking for the website and/or prospectus, you can find those here.

How Financial Advisors Might “Pitch” This Annuity

While this is technically a Variable Annuity, it looks a lot like other annuities that brokers/agents call a hybrid annuity. In the past few years insurance agents have fallen in love with the term “hybrid annuity.” Even though the insurance companies don’t seem to like the term a whole lot, I guess the cool sounding name makes it easier to sell annuities, so it’s caught on nonetheless.  When agents use the term “hybrid,” they are referring to an annuity that has multiple annuity features rolled into a single product.

In the case of the Defined Income Annuity, it combines a lifetime income guarantee with the possibility of higher returns linked to the AST Long Duration Bond Portfolio; so whether Prudential likes it or not – some advisors might call it a hybrid annuity.

It you hear it described as a “hybrid annuity” – there are a few different ways it might be pitched.  My experience, however, is that most sales agents will cling to two main components:

  1. The safety combined with return potential of the bond market
  2. The guaranteed income for life (Defined Income) that makes the worse case scenario pretty desirable

While those are true statements, this annuity is not perfect (nor all bad).  It can work well when used correctly, but has shortcomings just like any other financial product.  One of the biggest issues I’ve run into, is that many agents misrepresent how this annuity will actually perform.  That’s a problem.

From the many people I’ve talked to personally about their experience with agents, most seem to have been told this annuity will perform “better” than other annuities.  Because the income growth is currently 5.5%, and the payout rate can be over 5%; some people seem to think that is the actual return.

Is any of that true?  Eh, not exactly.

If your agent/advisor explains this annuity correctly, you should never get the impression you’ll earn more than 2% to 5%. It could produce a return of 0%. If bigger returns than that are part of your agents sales pitch – run, don’t walk, to find a more honest financial advisor.

Complete Video Review of the Prudential Defined Income Variable Annuity

Warning: We tend to get pretty in-depth and a little geeky with video reviews.  This particular video is very thorough and will show you exactly how to calculate Defined Income Annuity performance.  Enjoy, but consider yourself warned ;) .

As you can see from the video review there are some nice components of the Defined Income Annuity, but also some real drawbacks. In the video I mention a Schwab study where they estimate future bond returns are likely to be much lower than past bond returns. If that comes to fruition (and the article illustrates some very good reasons why it might), it would not be good for the AST Long Duration Bond Portfolio.

You can find that article here.

The Annuity Gator’s End Take on the Defined Income Annuity

Where it works best:

  • For producing a reliable, “pension like” guaranteed income stream
  • For producing an income for life that cannot be outlived by a surviving spouse
  • For investors who have a family history of life longevity
  • For investors that have no need for their money or generating large returns, but want it to grow safely until transferred to their beneficiaries

Where it works worst:

  • For those that do not plan on using the Defined Income Benefit
  • For those seeking maximum long term growth
  • For those needing retirement income that goes up with inflation

In Summary

One of the most important things for investors to understand is that the “income growth rate” is not the actual return, nor is the “income percentage” the actual return.  In no way will it produce the 5% to 8% return numbers a lot of uneducated advisors toss around when trying to sell it.

For someone strictly looking for guaranteed income with no market risk, there may be better options available.  For someone looking for an investment that cannot go down, is content with lower single digit returns, and wants the financial strength of a really solid company – this might be a good fit.

I’m still convinced most agents don’t realize what the real returns are though, and significantly overpromise what’s realistic – so be especially wary of anyone who suggests this annuity will work better than how I illustrated it here.  If the agents are being upfront and honest, you’ll notice their explanations match very closely (if not exactly) as described in this review.  When that happens, you have an agent you can trust.

As a recap to the video (for those that don’t have 40+ minutes to watch it), the Defined Income Annuity will not actually return 6%.  Nor will it likely return 5%.  When financial advisors use those numbers they are referring to percentages used to calculate the income guarantee.

The only way to know if this annuity is a good fit for you, is to have it tested.  We do this free at AnnuityGator.com,so just get in touch with me and I’ll use the calculator from the video to illustrate for you what returns for your situation are likely to be.  If your agent was honest with you the numbers will match up – if not, well then you might want to reconsider who your agent is.

Have Questions on the Prudential Defined Income Annuity?  See any Mistakes?

If you have questions please let me know. [You can reach me via the Free Annuity Help form here]

I know annuities can be confusing and a lot of people are pushing investors very hard to buy them.  But you need to know the real facts to make sure if you go that route you don’t end up regretting it later.  After all, annuities are long term investments with contracts, surrender penalties, etc.  For some people they won’t make sense at all, but for some they might.

If you know anyone who has an annuity or is thinking of buying one, please share this post with them.  I know a lot of people are getting very conflicting information and my goal in writing this review and making the video was to educate in an objective way.  If you have a Facebook account you can click on the little “Facebook” icon and share this article.  That way more people will be able to find it and hopefully more people will benefit.

Thanks for bearing with me on this rather long post, I hope you found it beneficial in your research.

Lastly, like all humans – I do make mistakes.  If you see one on this review please reach out and let me know.  I’m always more than happy to make corrections and give credit where it is due.  If you’re an investor and this review causes confusion and creates questions feel free to reach out as well.  I can’t always get back right away but usually I can clear up those questions within a day or two.

Best,

The Annuity Gator

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Jason is the founder of AnnuityGator.com and a frequent contributor to the site. He has been breaking down the complexities of financial products for over 12 years with his extreme geekery...and translating them into simple explanations for the rest of us. Jason is a sought after speaker/educator by major financial services companies such as TD Ameritrade and Allianz for his unique expertise in quant finance (see, we told you he was a geek) and social media.

2 responses to Independent Review of the Prudential Defined Income Variable Annuity

  1. I have yet to find one comment on your site that implies an annuity would be a good option.

    **the rest of this comment was edited as offending language was used**

    • Hi Mike,

      Thanks for writing and sorry some of your comments had to be edited out. It’s always a good idea to be careful what you write so as not to offend some site visitors.

      To help you out – I think annuities can be a great part of a portfolio when used correctly. So long as it meets and investors needs and they are comfortable with lowering the risk of their portfolio in exchange for modest returns and guaranteed income for life. Where a lot of annuity problems are created is when agents mislead investors into believing an annuity will get better returns than is likely. It’s a shame this happens, but it does. When illustrated correctly, many of the best annuities will still be considered desirable for more conservative investors. The big thing is most annuities today will only produce an effective annualized return in the 2% to 4% range over 20 or more years. This is fine when the benefits are truly desired for a client. When an agent tried to convince their potential client they will make 6% or more with no risk…well that’s just not honest.

      Hope that clarifies some things.

      Best,

      -Annuity Gator

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