Filed Under:Annuities, Fixed Indexed

Extreme makeover: Variable annuity edition

Photo credit: Vichie81
Photo credit: Vichie81

Ask Andrew Lord, founder and president of Essential Planning, LLC, in Portsmouth, N.H., if more of his clients are purchasing annuities with lifetime income riders now and he answers plainly, “I don’t see anybody buying them without them.”

In fact, a few years ago, when he saw the growing demand for guaranteed lifetime withdrawal benefits (GLWBs), Lord renewed his securities license so he could sell variable annuities (VAs) with those add-ons. “Took all the tests again like when I was a kid because I thought it was such an important benefit for my clientele,” he says.

However, the landscape is rapidly changing in regards to GLWBs attached to variable annuities. Still widely popular with consumers, insurers are finding these once powerful selling points are coming back to haunt them as interest rates remain stubbornly low, making it difficult to underwrite payouts that could go on far into the future.

In response, some carriers have proposed their policyholders consider voluntary changes to VA contracts. Two noteworthy examples:

  • In May, Transamerica offered current holders of several of its VAs with guaranteed lifetime income benefits the option to drop those riders in exchange for an enhanced full cash surrender value.
  • A month later, AXA Equitable gave owners of its Accumulator® variable annuity the choice to trade the guaranteed minimum death benefit for a higher account value. A spokesperson for the company said in an email: “This is an optional, limited time offer on Accumulator contracts issued between 2002 and 2007, intended to benefit the client and the company. Clients can terminate and stop paying for guaranteed death benefit riders they may no longer need, and the company benefits because these riders are expensive in today's market.”

Others carriers, meanwhile, are taking a more unilateral approach. Prudential recently informed owners of several of its annuities that they can no longer make additional purchase payments. The suspension went into effect September 14.

"The decision...was made as a direct result of the persistent low interest rate environment that has impacted our industry. Our goal remains to continue to proactively and prudently manage the assets investors entrust to us," said Prudential spokesperson Lisa Bennett via email. She declined to comment on the duration of the suspension.

In other instances, insurers are trimming withdrawal percentages and raising fees. In its second-quarter analysis of the VA market, Morningstar charted 168 product changes, up from 59 in the first quarter but nearly on par with the 162 a year earlier. In the report, John McCarthy, product manager, annuity solutions at Morningstar, wrote that “carriers are dealing with the reality that living benefits are costly to maintain.”

For others, scaling back their VA business (MetLife) or exiting the line altogether (Hartford) is the chosen path.

An expensive hedge

Due to historically low interest rates, Eric Henderson, senior vice president, individual products and solutions for Nationwide in Columbus, Ohio, concedes hedging guaranteed income riders has become more expensive for insurers. In the VA space, an insurer’s primary risk is on the equity market side more than so longevity.

Accordingly, carriers are trimming benefits while trying to keep a lid on price hikes. “You end up pulling back on the amount of benefit you can provide for the same price,” Henderson says.

Bruce Ferris, head of sales and distribution for Prudential Annuities, in Shelton, Conn., says that about 90 percent of the variable annuities it sells are bought with the living benefit rider. Such a benefit typically costs between 95 and 150 basis points of the account balance industry-wide, he notes.

Yet Ferris concedes that annuity producers, like Prudential, are not immune from current capital market conditions. Therefore, carriers are fine-tuning their benefit platforms. For example, Ferris says that prior to 2008, roll-ups were generally in the 6 percent to 8 percent range; today, roll-ups bounce between 4 percent and 5 percent.

“For the sustainability of these solutions over the long-term, I think it’s prudent of our industry” to make those adjustments, Ferris says.

VAs without GLWBs

Others entering the VA market‑not all are leaving‑have opted to offer a product without an optional living income rider.

When it launched its LiveWell Variable Annuitysm back in March, Sammons Retirement Solutions, a broker-dealer affiliated with Sammons Financial Group, designed it without the option to buy a guaranteed lifetime income rider, or any other rider for that matter.

Instead, its main focus in designing the VA was to keep the structure simple and costs down, while touting its tax-deferral features, says Bill Lowe, president of Sammons Retirement Solutions in West Des Moines, Iowa. The VA is built around a more robust fund menu that includes tactical and emerging market funds, something it could it not do if the product offered a living benefit rider, Lowe says. And another thing: Sammons’ VA has no surrender charge.

Lowe says offering lifetime income guarantees in the current low-interest rate environment is simply not affordable for an annuity provider. “Which is why you’ve seen a lot of companies pulling out of the market, pulling products and redoing products,” Lowe says. “Because they just weren’t priced to be sustainable at these levels.” Yet he adds that Sammons Retirement Solutions may enter the living benefit marketplace when “the environment is more conducive to that.”

Meanwhile, more fixed indexed annuities now offer a GLWB.

Yet even with less liberal benefits, Henderson maintains VAs are still worth the price. “When you look at rates on a fixed annuity or CD or any other type of fixed investment I still they make a lot of sense.”

Consumers want ‘em

A study by NFP Advisor Services Group found that nearly half of U.S. households in 2010 indicated an interest in products with guaranteed income for life. What’s more, they said they would be willing to accept a lower rate of return for that benefit. It’s not hard to understand why: Many boomers now face the prospect of retirement without a company-sponsored pension plan. So a product that offers a lifetime of regular income is attractive.

But the advisory community may be lukewarm toward the riders. When NFP surveyed the advisory community, it found that independent RIAs recommended guaranteed income products just 49 percent of the time. Advisors affiliated with independent broker-dealers endorsed them 69 percent of the time. The highest recommendation rate was found among advisors allied with an insurance broker-dealer at 80 percent.

Many advisors may be turned off by guaranteed lifetime income riders because of the fee tacked onto the annuity, suggests Lloyd Lofton, chief operating officer of American Eagle Financial Services Inc., in Smyrna, Ga. For many retirees and pre-retirees, however, that extra expense is well worth it, especially with news reports blaring how Social Security could be insolvent during their lifetime.

“I think 25 percent of prospects today are more likely to pay the extra 1 percent to have that income rider,” Lofton says. “I think advisors sometime view guaranteed income as an expense and they think their clients can get a better return [elsewhere]. But sometimes it’s not always about the return. Sometimes it’s about the comfort and the security of knowing that part of your income is never going to change.”

Nevertheless, whether a client should purchase these riders depends on a number of factors, such as age and the totality of their nest egg, Lofton says. “I would recommend it to the client whose personal situation and goals it’s appropriate for. And that’s probably not going to be every client.”

Typically, a candidate for an annuity with a GLWB rider would be between 65 and 72, with enough income from other sources to cover most of their expected needs over the next 10 years, Lofton says. “I don’t think they should be paying for a rider that after getting the annuity and paying their bills they have more month left than check,” he adds.

More product makeovers

For both policyholders and their advisors, all these switch-ups in their annuity contracts can be confounding. What should an advisor advise a client to do when asked by an insurer to voluntarily make changes in the contract as AXA Equitable and Transamerica have done?

Andrew Lord has two answers to that dilemma. On one hand, each case must be reviewed individually in the context of what the policyholder wants to accomplish. “A lot of that has to do with the performance of the policy, the timing of when they bought it, and the client’s other assets,” Lord says.

Yet, he is also outspoken in his belief that the policyholder may not be the ultimate beneficiary of the proposed modifications. “I believe at the end of the day it has very little to do with enhancing benefits for the client and a lot to do with a carrier trying to jettison a liability,” Lord says.

He also predicts more product makeovers. “They’ll tamper with the riders. They’ll tamper with the pricing. They’ll go back to existing clients and try to renegotiate the deal to the extent they can legally because they mispriced the product,” Lord says. “At the end of the day it’s an insurance benefit that wasn’t designed very well actuarially.”

Speaking from the carrier’s viewpoint and not commenting on any specific company, Henderson says as long as the policyholder is given a voluntary choice, the practice is proper.

“There’s been a number of companies that have a lot of this risk on their books,” he says. “So putting an offer like that out there is a fair thing to do. It’s voluntary for customers and for some customers it won’t make sense and for others, it might make sense. As long as it’s a voluntary thing, giving choice to customers is always a good thing.”

The question for advisors and their clients is whether they will continue to have the choice of a GLWB in a VA and in what form.

Tell us what you, as an advisor, think of all these changes. What would you advise your client to do?

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