VA Competition Is Still Hot: MFS Adds Another Earnings Rider
When the four MFS Regatta Annuities debuted their new “earnings enhancement benefit” in April 2000, the variable annuity wonks at MFS Investment Management expected the feature would do well.
“Almost 70% of new Regatta VAs have been issued with the benefit attached,” says Michael Mulkern, vice president and director of marketing for insurance products at the Boston firm, a subsidiary of Sun Life of Canada.
But thats not the end of the story. In June, MFS brought out a brand-new earnings benefit–the “earnings enhancement benefit plus.”
The new entry is similar, but bolder, than its forerunner. The story of its rollout reveals much about the fierce competitiveness in todays VA market, and about the dont-sit-back mood of its players.
As noted, the new feature resembles MFSs original EEB. That original option enhances the VA death benefit by 40% of total policy earnings, subject to a cap of 40% of net purchase payments, in the event the owner dies before the policy is annuitized. (Thats for under age 70. For ages 70-79, the figures drop to 25% and 25%, respectively.)
The purpose: To give VA beneficiaries extra funds with which to pay taxes due on the VAs earnings. The majority of VA owners die with their VAs intact, explains Mulkern, so the extra funds can help.
The new optionEEB Plusbeefs up that enhanced payout substantially. Specifically, for ages under 70, it pays 40% of policy earnings, up to 100% of net purchase payments, if the owner dies before annuitization. (For ages 70-79, the figures are 25% and 40%, respectively.)
The effect, says Mulkern, is that “the EEB Plus benefits wont cap out until the VA account value reaches 350% of purchase payments. By contrast, a VA that includes the original EEB feature caps out only 200%.”
Actually, he says, MFS buyers now pick and choose from several death benefit options. The company has arranged them into two “packages:”
–Package I. This offers the original EEB, a maximum anniversary value (MAV) death benefit, and a 5% minimum guaranteed benefit (5% MG). Cost is 15 basis points for one feature, 25 for two, or 40 for all three.
–Package II. This offers the new EEB Plus, and the option to add either the MAV or the 5% MG. Cost is 25 bps for Plus alone, or 40 bps with either of the two options added.
Why so much choice, particularly in todays bear market? The answer has a lot to do with competition–and market trends, says Mulkern.
After MFS debuted its original EEB, a slew of competitors came out with earnings benefits of their own, he explains. Many have look-alike names, he adds, noting this has become a problem. “Sun Life, our parent, has service marked the ‘earnings enhancement benefit name and also ‘earnings enhancement benefit plus,’” he explains.
MFS did not want its own feature to fall by the wayside, Mulkern says. “It kills us to see the competition trying to steal our thunder. We wanted to get back on top.”
So the company soon began talking with producers and wholesalers about new needs, and then drafting plans to offer a new option. The upshot: It developed EEB Plus for a very specific buyer.
“EEB Plus is for people who plan to hold their VAs for a long time and who expect the policy value to more than double by time of death,” says Mulkern. Many such buyers exist, he indicates.
Although the company still offers both options, Mulkern says that, since rollout of Plus, the focus has been more on Package II. “Its still early,” he allows, but “indications are that people with a longer time horizon favor taking EEB Plus with the MAV option.”
He suspects the appeal is that the EEB Plus/MAV combo provides opportunity for beneficiaries to receive more money. To the target buyer, the extra 40 bps this combo costs is worth it, he says.
Sample case: Say a $100,000 VA has both the EEB Plus and the MAV. If the account value is $250,000 at time of death, but the highest maximum anniversary value (MAV) was $300,000, the company computes the EEB Plus benefit based on the $300,000. This benefit would be 40% of $200,000 ($300,000 minus the $100,000 principal), or $80,000. The beneficiary in this case would receive $380,000 (the $300,000 plus the $80,000 EEB Plus).
Mulkern speculates the combo has appeal, despite the nervousness in the stock market, because its a type of bulls-and-bears option. The Plus component responds to bull market scenarios, he explains, while the MAV piece has bear market qualities.
A “spousal continuance feature” offered in MFS VAs also has value for EEB buyers, he maintains. This allows a surviving spouse to continue the VA as the ownerat issue age, not attained agewith the account value equal to the selected death benefit plus the EEB or EEB Plus value. When the survivor later dies, the EEB or EEB Plus option kicks in again.
“Most VA owners are married, and theyre concerned about protecting their families in case of death,” says Mulkern, so spousal features are part of longevity planning.
But EEB riders are not sold in a vacuum, he stresses. “We present them in the context of other core advantages of VAs, like tax deferral, flexible investments, income opportunities, etc.”
Final notes: MFS believes EEB Plus will encourage persistency among VA owners. Approved in most states, the option is reinsured.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 3, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.