Today, I’m going to give as unbiased a review as I can of the Jackson National Perspective II Variable Annuity with LifeGuard Freedom Flex. A financial product like an annuity may not be useful for everyone, but there are those out there that could benefit from an annuity.
As a financial planner, people that I know usually approach me for financial advice. Recently, I’ve gotten more and more questions about annuities, so I thought I’d do an annuity review for the blog. As an independent fee-only financial planner, I don’t sell annuities, but I try to keep an open mind when I review financial products.
I have also filmed a video review for the Jackson National Perspective II Annuity that goes in depth about its features and how it handles some stress tests I put it through.
This review has been updated as of July 2013.
(Before we get started, I’d like to thank Jason Wenk over at his blog JasonWenk.com for the inspiration for this post.)
First, before we continue, I need to post a legal disclosure:
This article is considered a review. This article is neither a recommendation to buy nor a recommendation to sell an annuity. I am not compensated for this review. I am doing this review on my own volition. Jackson National has not endorsed this review in any way. Before purchasing any investment product you should perform your own due diligence by reviewing the prospectus and other materials for the product. This review should not be considered personalized advice. Please, consult a properly licensed professional should have specific question about how this product can fit into your individual financial circumstances. All names, trademarks, and materials used for this review are property of their respective owners.
Now that’s done, let’s get started.
Quick Background of Variable Annuities
A standard variable annuity (VA) allows investors to invest in subaccounts, which are like mutual funds, within the VA. Investors take on the risks of the market and usually have some sort of death benefit associated with the annuity for their heirs.
Over the past decade, new riders have come out for variable annuities that offer income guarantees. Typically, these products are sold as allowing investors to participate in the market, and get any upside from market growth, while avoiding a loss of income from a situation such as the Great Recession.
The story that salespeople tell about these lifetime income riders is that they offer an investor a minimum income for life even if the investments take a dive.
The Financial Crisis of ‘08-‘09 has caused many investors to fear another recession and a lot of salespeople are exploiting that fear. My worry is that investors aren’t getting all of the facts that they need to properly evaluate these complex financial products. Even worse, many salespeople may not even know how these products work themselves because they haven’t taken an in-depth look and broken one down piece by piece.
What are the Fees for this Annuity?
So now we’ll go over fees, and after that I’ll show you the break down and stress test of the annuity.
Typically variable annuities pay a 6-7% commission to the agent/broker. That’s why the insurance company charges you a surrender charge or what this brochure calls a contingent deferred sales charge. if you don’t stay in the annuity long enough for the company to make a profit, you pay a surrender charge.
A surrender charge is a way for the insurance company to recover the costs of the commission they pay and it decreases over time.
Here is the surrender charge schedule for the Jackson National Perspective II Variable Annuity:
As you can see, the surrender charge decreases each year until it goes to 0% after you hold your annuity for 7 years. The surrender charge is a separate expense from the annual fees associated with the account.
Beyond the surrender charge, there are also several other types of expenses.
The following is a list of the various expenses of the Jackson National Perspective II Annuity:
- The base fee for owning the Perspective II Annuity is 1.30%.
- There are 104 subaccounts. These will act like mutual funds for investors. There is a pretty wide range in mutual fund expenses. Ranging from 0.41% to 2.23%.
- The Perspective II has an average subaccount expense of 0.95%. The model in the review uses the S&P 500 subaccount for a total of 0.59% in expenses.
- The expense for the LifeGuard Freedom Flex rider with an Annual Step-Up, 7% Bonus, and optional income upgrade is 1.50%.
- Death benefit rider expenses for the Lifeguard Freedom Flex DB Rider are 0.80% annually, paid on a quarterly basis. These are not included in the video review.
The typical investor will probably not experience all of these expenses, but it’s good to know that the maximum Jackson National can charge is incredibly high. If you add up all of the expenses for benefits and riders and the highest mutual funds, you can clear over 6% per year. In the video I use the expenses for the S&P 500 subaccount, the cost of the income rider, and the annuity expenses.
Features of the Annuity
Like all annuities, investors looking to purchase the Perspective II are typically doing so for the features that an annuity offers that may protect against downside risk.
The Jackson National Perspective II annuity has the following features. Because it is a variable annuity, it acts as a bucket into which you put your money. You then invest the money in that bucket into different mutual funds within the annuity. These mutual funds are called subaccounts and are only invested in by investors with variable annuities.
Because variable annuities have contract values that go up and down with the market, they normally offer some type of death benefit before you annuitize the annuity, which means to begin the withdrawal phase of the annuity. This benefit basically offers you the greater of the value of the annuity or the amount you originally invested.
Finally you have a withdrawal schedule that enables you to take withdrawals before you annuitize your contract. This is how much you can take out of the annuity each year without being penalized. Typically it is 10% of the annuity’s value each year.
So, how does the LifeGuard Freedom Flex income rider work?
This is a very complex annuity rider with a lot of moving parts so pay close attention.
This version of the Perspective II annuity has two components, the income base and the contract value. The income base is the amount that the income guarantee of the contract is based on. The contract value is the value of your subaccounts.
For the first 10 years of your contract the income base will be credited by the percentage that you’ve chosen. The fee associated with your annuity will vary based upon the percentage you’d like your annuity to “step up” each year. Here are the expenses for the various income rider options:
For the purpose of this review, I chose the LifeGuard Freedom Flex with 7% Bonus and Annual Step-Ups optional income upgrade, which has 1.50% in additional fees. The joint survivor variation is no longer available.
Each year (quarterly options are no longer available) Jackson National will compare the guaranteed income base of the annuity to your annuity contract value (the value of your subaccounts) and “lock in” the higher of the two values. If the contract value is lower than the value of your income base, the 7% increase will step in and increase your income base by 7%. This does not affect the value of your subaccounts.
So, during the sales pitch, the LifeGuard Freedom Flex rider is sold as a guarantee that you get the higher of either market growth or 7%. The fees greatly reduce the returns of the portfolio, so I don’t think this is a fair representation of how it works. It’s unlikely that your portfolio will generate returns in excess of 7% after fees, as you’ll see in the video. This may cause you to be limited to the gains from the 7% bump each year for the first 10 years, which again, do not apply to the cash value of your account. They only apply to the income base, upon which the income withdrawals will be calculated when you begin taking withdrawals.
There is also a 200% Guaranteed Withdrawal Balance Adjustment that will increase your income base to 200% of the original premium value after 12 years. If you were to invest $100,000 in this annuity and then wait 12 years to begin withdrawals, your income base would increase to $200,000. If you were 77 when you began taking withdrawals, this would be an $11,000 per year stream of income.
While this sounds fantastic, it’s interesting to see how it might play out in reality.
Video Review of the Jackson National Perspective II Annuity
Here I walk you through what the data tells us about the Perspective II. In the video I use an excel model of this annuity to break down the returns a 65 year old investor could expect to have. If you are interested in the Perspective II Variable Annuity, it’s a must-watch.
Here’s the updated annuity review video for 2013.
Here’s the original video I recorded in October 2012.
Some Final Thoughts on the Jackson National Perspective II Variable Annuity with LifeGuard Freedom Flex
This annuity offers compelling benefits and a lifetime stream of income. However, if you are looking for an financial product that offers both growth and income, this will not fit your needs. The high fees on this annuity, which were 3.39% with the features in the video, cause the Perspective II annuity to be a poor vehicle for growth. The majority of the allure of this annuity is in the Lifeguard Freedom Flex rider. It will take quite some time to get a return on your investment with this annuity and those searching for guaranteed income products may wish to look elsewhere.
Now I don’t think these advisors and salespeople are bad people for not explaining these annuities like I did for you in the video. I just think they aren’t fully informed about how these annuities work. You see, I have several friends in the insurance business that said they were very interested in seeing my thoughts on various annuities and encouraged me to write this review. With complicated financial products it’s tough to go through all of the data and model it all out. Unfortunately, that’s really the only way to understand how they work.
Have Any Questions?
If you have any questions, please contact me. Annuities, with all of their guarantees and lifetime income riders, are just flat out complicated financial products. They can be really confusing, especially when a salesperson is putting pressure on you to buy an annuity as soon as possible. Before you put a large amount of your savings into an annuity, consider your options. As you saw in the annuity review, annuities are a long term investment with surrender charges, so I think it’s important that you know the facts about an annuity before you buy it.
You should have an independent financial planner give you an objective opinion about whether an annuity is right for you and explore better ways to protect your savings while generating reasonable returns. As a fee-only financial planner, I’m only paid by my clients and I don’t receive any commissions from insurance or brokerage companies. This means I’ll objectively review your finances and tell you whether or not an annuity makes sense in your situation.
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As of October 15, 2012 Jackson National no longer offers the joint life expectancy payout option for its Lifeguard Freedom 6 Net and Lifeguard Freedom Flex income riders.
As of July 18, 2013. This annuity review article has been updated and a new video has been filmed and uploaded to YouTube to reflect changes Jackson National has made to this annuity.