When Ohio National Life introduces a new version of its ONCore variable annuity early next year, the contract will sport a rich living benefit. Its GLWB will offer an 8% annual deferral bonus and a single-life payout of 5.25% at age 65, according to the prospectus. The initial rider fee is 110 basis points a year. How can the Cincinnati-based insurer afford to offer this alluring value proposition?

Because it requires contract owners to allocate much of their money to three volatility-managed portfolios from TOPS, an ETF portfolio manager. The portfolios all contain a futures-based hedging strategy that aims to cut off extreme performance, especially on the downside.

The hedging strategy, which was developed by Milliman, involves buying short equity index futures when the market goes up and selling them when the market goes down.

As Milliman’s Kamilla Svajgl said in a presentation at the Society of Actuaries conference on Equity-Based Insurance Guarantees Conference, “It’s like having an airbag in your car. You have protection.”

Reprinted from the November 23, 2011 issue of Retirement Income Journal. Copyright © 2011.