A string of redesigned variable annuities are hitting the market, after life insurers last year yanked the products that proved too generous to customers and threatened some insurers' financial health. So writes Leslie Scism in the Wall Street Journal.
"Guarantees of lifetime payments were a major strain on insurers after the market slide of 2008 and 2009. Insurers quickly pulled the juiciest deals off the market--subbing in less-generous versions at higher prices.
"Now, they are rolling out fresh designs. The good news for consumers is that costs in the famously expensive products are edging down, and one of the new offerings has an interest-rate adjustment feature that will appeal to many baby boomers worried about inflation."
But in general, she notes, the new guarantees continue a trend in which insurers are trying to minimize their risk and consumer choice, by, say, requiring that buyers put 30% or more of their money into bond funds.
"The flurry of activity represents what consultants say is the start of a transformation of the variable-annuity business, as insurers try "to come up with a sustainable product that people want to buy" to help save for retirement and protect against a deep market downturn, said Ken Mungan, a practice leader at consulting firm Milliman Inc. "That means simple, low-cost, easy for people to understand," he said, predicting 'significant changes throughout 2010.'"
The bottom line, according to Scism, is that the new-generation products can be valuable to some consumers as a slice of an overall portfolio, advisers say, provided they know the drawbacks. A knock long has been the cost, with fees sometimes topping 3.5%, a serious drag on owners' fund returns.
Yet the products' safety net gives many cautious boomers the fortitude to keep some money in stocks, in hopes that big years for the market will deliver high-enough returns to overcome the fees--and make falling back on the guarantee unnecessary.
Scism lists AXA Equitable as a top seller of variable annuities in recent years and was a pioneer of the guarantees in the 1990s.
In November, insurer MetLife Inc. teamed with Fidelity Investments for the Boston fund giant to sell "MetLife Growth and Guaranteed Income" variable annuity. It restricts buyers to a single Fidelity asset-allocation fund, annually locking investment gains into the benefit base. Depending on the investor's age, lifetime withdrawals range from 4% to 6% of the base. All-in cost: 2.7% a year.
Buyers of "AnnuityNote" from Manulife Financial Corp.'s John Hancock unit invest in a designated indexed-based stock and bond fund.