Today’s media coverage of the variable annuity market has focused on company buybacks and modifications to existing clients’ product guarantees—a prospect that has many clients feeling more wary than ever about annuity purchases. (See our previous posting on carriers seeking to modify existing variable annuities with lifetime guarantees.)
Despite this, insurance companies have used the negative experiences of recent months as motivation to effect positive change in their annuity product offerings by offering clients real flexibility and risk management options. Stacking roll-up up features allow clients to tie annuity payouts to market performance while still allowing them to take advantage of guaranteed death benefit and lifetime guarantee add-on options. This new generation of annuity products should help clients navigate today’s challenging markets with the added bonus that they realistically manage risk while minimizing tax liabilities.
Setting the State: Current Annuity Market Challenges
As a result of today’s protracted low interest rate environment, combined with lower than expected lapse rates on existing contracts, many annuity providers will realize substantial losses absent modification to, or outright elimination of, lifetime income guarantees sold in connection with products in recent years. While some carriers have offered buybacks to existing contract owners and others have sought to require more conservative investment strategy, the result is the same: clients may perceive these products as less secure investment vehicles.
Insurance Companies Respond with New Product Offerings
These client perceptions, coupled with market conditions themselves, have created an impetus for action among insurance companies. In recent weeks, major carriers have released new product offerings in both the fixed and variable annuity markets.
Fixed annuity products have been developed to offer clients both guaranteed minimum death benefits and optional lifetime income riders so that the annuity product can serve the dual role of both a retirement income and estate planning tool. Clients who purchase these annuity products are able to realize growth in the death benefits provided under the contract through interest credits so that the client may be able to leave a greater benefit to his beneficiaries upon death, depending on market performance.
These products also offer a stacking roll-up feature, which allows the interest rate risk to be managed in that the lifetime income payout rate, which is partially fixed, is also tied to the contract’s investment earnings. This system mitigates the risk that insurance companies will, once again, face unanticipated losses and require product modifications.
New variable annuity product offerings have focused on presenting clients with a wider range of investment options in light of higher taxes on traditional investment-type income in 2013. As such, clients have greater opportunity to participate in the equity markets within tax-deferred vehicles that can help to minimize investment income tax liability.
Broadened investment options within these variable annuity products recognize the fact that many annuity investors have begun to use annuity products as a substitute for equity investments in light of continued low interest rates and perceived market risk. Therefore, they seek to allow each client to manage his own risk profile—effectively recognizing the need to allocate risk more appropriately between company and client to prevent the need for future product modifications.
Importantly, both fixed and variable annuity offerings allow the client greater flexibility in making withdrawals, creating a more liquid investment than clients may have come to expect from annuity investing by reducing or eliminating the fees for early withdrawal or surrender that are often associated with these contracts. As a result, these products more closely resemble direct investments in the equity markets, with greatly reduced risk.
While every client’s annuity strategy must be determined on an individual basis, new product offerings by insurance companies should help alleviate some of the concerns that clients may have about the state of the annuity market today. Many new products require the client to assume a degree of market risk, but they also reflect the reality of today’s economy and very possibly increase the odds that the product features will remain constant in the long run.
See our previous posting on carriers seeking to modify existing variable annuities with lifetime guarantees on ThinkAdvisor.
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