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Peace of mind, but it doesn't come cheap

Popular with pre-retirees, new insurance products boast reliable retirement income, even if some experts question their value

Special to The Globe and Mail

It's a tricky insurance product that some financial advisers say is expensive, but for the peace of mind it brings, it's worth it, says Peter Hollings of the segregated funds he bought for his RRSP.

"Here I am on the doorstop of retirement, hopefully reducing the worry load," says Mr. Hollings of his $100,000 Manulife Income Plus GIF policy. "That's where this [policy] fits in."

The 68-year-old, semi-retired software consultant wanted to calm any anxiety that he and his wife, Suraiya, felt about running out of income in their retirement years.

"Worry is for work," says the Richmond Hill, Ont., resident.

Here's how his policy works: Mr. Hollings essentially invests in a portfolio of segregated funds that he chooses to match his needs.

The hook is that his funds are insured, and guaranteed to pay out at least 5 per cent a year.

This feature is called the guaranteed minimum withdrawal benefit, or GMWB for short.

When he chooses to start drawing down income, Mr. Hollings' $100,000 investment will pay a minimum of $5,000 a year until he dies, even if equity markets were to completely wipe out his initial investment.

Manulife's GMWB product, which reached $2-billion in sales about a year after its launch in October 2006, is one of several such products on the market that are tapping into a deepening well of pre-retirees who want the assurance that they won't run out of funds in their golden years.

"For some investors it's a good alternative to a guaranteed investment certificate or a life annuity," says Tina Tehranchian, the financial planner from Assante Wealth Management who sold the product to Mr. Hollings.

"[It's] for those who want to participate in the markets, but who want to have some guarantees and peace of mind as well," Ms. Tehranchian says.

Mr. Hollings, who owned his consulting business for more than 20 years, says the product fills the gap where a full corporate pension doesn't exist - a common trend today.

"In the old days, they got a pension from the company for which they were working," says Moshe Milevsky, associate professor of finance at York University in Toronto and executive director of the Individual Finance and Insurance Decision Centre in Toronto.

"That provided longevity insurance. But a lot of people are approaching retirement without that sort of pension and they're looking around for something ... that is as close to a pension as possible. That's what these products are filling the need for," Mr. Milesvky says.

In light of Manulife's initial success with the GMWB product in Canada, and the huge interest in the product seen for some time in the United States, other Canadian firms now offer these products, with various features.

Sun Life Financial Inc. offers the SunWise Elite Plus, Montreal-based Desjardins Financial Security sells the Helios, while Industrial Alliance, Insurance and Financial Services Inc., based in Quebec City, recently announced its product, the Ecoflextra.

"That's good for consumers because the more competition, the more features, and the more competitive the cost structure," says Ms. Tehranchian.

The minimum initial investment ranges from $50,000 in the Manulife product to $5,000 for Desjardins' Helios. Each company offers a product with three basic features that can vary quite a bit, so investors should read the fine print on guaranteed payouts, bonuses, and step-up features.

The guarantee

Manulife offers 5 per cent payout annually until death, up from its previous promise of 20 years (it grandfathered all policies purchased before the change). Sun Life has said it will extend the same guarantee. Desjardins' Helios product pays out for only 14 years, but at 7 per cent annually. Industrial Alliance, meanwhile, pays a 5-per-cent annual lifetime benefit, with a minimum of 20 years if the investor withdraws more than 5 per cent.

It's worth noting that in some cases, the lifetime guarantee is nullified if, at any time, the investor needs to withdraw more than 5 per cent from the original contract, for example to meet an unexpected emergency.

The bonus

For every year that the owner leaves his or her contract untouched, making no withdrawals, some companies add a 5-per-cent bonus to the amount that is guaranteed - for a period of up to 15 years in Manulife's case.

So if Mr. Hollings manages to leave his $100,000 untouched for 15 years, at minimum he would have $175,000 at his disposal when he decides to draw the income from the policy. "I will leave this untouched as long as I can while I use other money," he says of this bonus option.

The step-up

Another option, the step-up, adds an additional twist. This allows the policy owner to increase the value of his or her guaranteed contract by locking in market returns after long periods of equity growth. For example, the S&P/TSX Composite added more than 30 per cent between January 2003 and January 2006. Had Mr. Hollings bought the GMWB in 2003, and had he locked in returns in 2006, his stepped-up guarantee would be in excess of $130,000 from the initial $100,000.

Benefits and drawbacks

Insurance products offer other benefits. By law, for example, they are protected from creditors (a provision that varies by circumstance). Insurance assets also avoid probate, meaning that when the policy owner dies, the residual value flows directly to beneficiaries and need not undergo the sometimes long and costly estate process.

While the guaranteed income product has found a home in many Canadians' retirement portfolios, some financial planners say they will not recommend it to some clients; value and price are their main concerns.

Mr. Hollings' version of the Manulife product, for example, costs him about 3.5 per cent a year after he tallies management fees, administration and other product fees. Similar to a mutual fund, the company charges most of this cost by subtracting it from the investment's performance. Mr. Hollings says that for him, the cost is worth it.

But Brian Shumak, an independent Toronto-based financial planner, says that investors who have the time to invest before they need to draw down income, and the stomach to ride out volatility, are better off investing in straight-up equity products, at a fraction of the price of the GMWB product.

After all, he notes, equity markets tend to grow by 10 per cent a year, on average, over the course of a decade.

Bruce Cumming, a financial planner with FundEX Investments Inc. in Oakville, Ont., calls the GWMB product an "emotional sale."

Once investors hit retirement, he says, most would be better off buying an annuity, while leaving a portion of their funds in equities to continue growing if they're worried about longevity.

"Check back in 20 years and let's see who has done the best. Any guesses?" Mr. Cumming says.

© 2007 The Globe and Mail. All rights reserved.

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