March 9, 2012

NAIC Reviews Hybrid Annuities to Ensure Meaningful Guaranteed Income Promises

Hybrid income annuity products can be a great way to provide clients with a stream of income during retirement, especially when they offer guaranteed lifetime withdrawal benefits. Despite this, there are a number of reasons why clients may continue to resist locking their funds into an annuity. 

Typically, they worry about losing control of their retirement savings, or an insurance company’s failure to continue annuity payments should they die earlier than expected. The market turmoil of the past few years has generated an additional concern about the financial stability of the companies issuing annuity contracts. A recent National Association of Insurance Commissioners Life Insurance and Annuities Committee meeting should lead to new regulations that will clarify and conform hybrid income annuities in order to make them much easier to sell. 

What Is a Hybrid Income Annuity?

Hybrid income annuity products are annuities that are combined with a different type of annuity within the same annuity contract. For example, a contingent deferred annuity is an annuity that guarantees lifetime payments based on the value of the assets in the annuity account. Income payments are conditional upon the owner’s survival and the depletion of the assets in the account. Often, a GLWB rider is attached to the annuity to provide lifetime income payments that begin if there is a depletion or change in value of the annuity account’s assets. The addition of the GLWB rider is what makes the annuity a hybrid.

Synthetic hybrid income annuities, which are hybrid income annuities where the assets in the account are not owned by the insurer, are also being investigated, and would be subject to any new regulation. 

It is the guarantee component that has attracted regulators’ attention. In the past, this element was viewed as an option that was ancillary to the actual annuity product. Clients today regularly want guarantees built into their financial products, prompting the NAIC’s review into whether these features are accomplishing what providers have promised.

How Can the NAIC Review Help Your Clients?

The investigation will focus on consumer protection issues, including capital requirements and the methods used to determine the correct reserve levels for these products. The appropriate levels of exposure to market risk will also be examined. 

Though the final form of any regulations cannot be known at this early stage, they presumably would seek to ensure that life insurance companies selling hybrid annuity products take steps to make sure that their guarantees are effective by maintaining sufficient reserves and investing the annuity funds wisely.

Conclusion

The recent market volatility has depleted the retirement savings of many of your clients.  They have seen large financial firms fail and consolidate, and are often skeptical of a product that requires committing chunks of their retirement funds to a contract that probably won’t begin payouts for years. Simply put, they’re worried that the insurance company will not be around to make the payments. 

Consumer protection regulations can provide these clients with confidence in the product, because they are designed to ensure that the companies offering these products are taking steps to make sure that their assets remain safely invested well into the future.

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