variable annuity has become a game of one-upmanship, with insurers
adding features at a dizzying pace. Spearheading innovation are
guaranteed living benefits which provide investors with certainty
and carriers with higher fees. Charles Davis
reports.
With the equity market having rendered performance a non-factor
in the US variable annuity (VA) marketplace, product innovation is
seen as the only way to distinguish VAs. Beginning with guaranteed
minimum withdrawal benefits, the emphasis is being placed on
product features.
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The first guaranteed withdrawal riders came onto the US market only
six years ago, with the introduction of Hartford Financial Services
Group’s Principal First benefit. Today, more than 90 percent of the
$183.9 billion of VAs sold last year had a guaranteed living
benefit (GLB) available, according to research firm Limra
International.
The trade-off of higher fees for guaranteed benefits seems a bet
that investors are willing to make, and in today’s market, those
fees are just what carriers are looking for.
While there is no industry standard for the riders, most these days
feature a 7 percent annual rate at a 10-year roll-up, based largely
on the products that Prudential Financial, ING, Nationwide and
others introduced in 2007.
There are several types of performance guarantees with higher risk
charges for guarantees that are riskier for providers. Guaranteed
minimum death benefits can be differentiated in several ways,
including return of premium (essentially a guarantee that the
investor will not have a negative return); roll-up of premium at a
particular rate (a guarantee that the investor will achieve a
minimum rate of return, greater than zero); maximum anniversary
value (which looks back at account value on pre-set anniversaries,
and guarantees the investor will get at least as much as the
highest values upon death); and products that offer the investor a
choice of the greater of maximum anniversary value or particular
roll-up.
Insurers provide even greater insurance coverage on GLB, which tend
to be elective. Unlike death benefits, which the contract-holder
generally cannot time, living benefits pose significant risk for
insurers as contract-holders will likely exercise these benefits
when they are worth the most.
Issuers have differentiated themselves at the margins with bonuses,
income/accumulation hybrids, and flexibility around when a rider
must be purchased. Some contracts step up the income base to the
account value more frequently than others, and there are subtle
variations in pricing.
Providers continue to tinker
AXA Equitable Life recently unveiled Crossings: My Lifetime IRA, a
deferred VA aimed at retiring workers rolling over their workplace
savings plans. The product guarantees a retiree can withdraw at
least 5 percent annually for life, with incentives for strong
market performance and for delaying initial withdrawals.
ING recently announced several improvements to its LifePay Plus
benefit riders.
“The new ING LifePay Plus withdrawal options represent the next
step in the evolution of lifetime income solutions for retired
Americans,” said Valerie Brown, president of ING Retail Annuity, in
a press release.
Brown said the LifePay Plus guaranteed lifetime income VA rider
introduced in August 2006 accounted for nearly 70 percent of ING’s
new VA contracts during the fourth quarter of 2007. The popularity
of ING LifePay Plus helped push ING to second place among all VA
providers during that quarter, and interest has remained strong in
2008.
ING LifePay Plus owners can now take a withdrawal during the first
10 years without ending the 7 percent compounding step-up. For each
of the first 10 complete contract years, any year in which the
contract owner did not take a withdrawal, the withdrawal base from
the previous contract anniversary will increase by a minimum of 7
percent.
The maximum annual withdrawals are now set at 6 percent at age 70,
down from age 76 in the first iteration of the product.
“What is widely recognised as an industry-leading guaranteed
withdrawal benefit just got better,” Brown said. “The continuing
popularity of the competitive ING LifePay Plus withdrawal benefit
rider reflects what savers and their financial professionals view
as the right balance of guaranteed growth, control over how the
money is invested, and guaranteed future income benefits.”
AIG took the VA arms race a step further with the introduction of
MarketLock Income Plus – an optional withdrawal benefit that
provides investors with the upside potential of the equity markets
and lifetime income that is guaranteed to increase for up to 15
years – even in years when withdrawals are taken or the market
declines.
“Today’s economic conditions and market volatility have many
investors looking for solutions to help them retire stronger by
providing the income they need to help keep up with rising costs,”
said Jana Waring Greer, president of AIG SunAmerica Retirement
Markets in a press release.
“We have found that nearly 85 percent of investors over the age of
50 want strategies that can deliver rising income – when and how
they need it – regardless of what happens in the markets. By
providing the assurance that lifetime income can grow even after
retirees start taking income, AIG SunAmerica is at the forefront of
the industry in meeting this need.”
The popularity of GLBs is also playing a key role in the overall
success of VAs. According to Limra, in 2007, for new contracts
offering at least one GLB, a GLB was elected in 77 percent of sales
premium. In 2007, the overall election rate rose slightly during
the year, from 75 percent in the first quarter to 79 percent in the
fourth quarter.
GLBs are increasingly common in VA sales. More companies are
rolling out products with GLB features, and companies with GLB
riders are making enhancements to existing riders and offer them on
a larger portion of their existing suite of products.
The leading edge of boomers is entering their early 60s. GLBs offer
these individuals a safety net that enables them to stay in the
equity market with its greater long-term returns while guarding
against possible market downturns.
This positioning makes sense as people try to maximise their
retirement nest egg in an increasingly short time frame, knowing
that losses may be impossible to make up. Given this situation, it
is a safe bet that GLBs will continue to be a major driver of VA
sales in the years to come.
