VA Owners Don’t Annuitize, But Do Flock To Systematic Withdrawal Plans
Second of Three Parts
Income for lifeguaranteed. An annuity is the only financial product that can make this claim, yet less than one-half of 1% of variable annuity contracts are converted from accumulation to income in a given year.
Low annuitization rates and the reasons for them are well known within the VA industry. Through a survey of industry professionals and financial advisors, Financial Research Corporation learned that of the relatively few VA contract owners who do annuitize, nearly two-thirds opt for income over a pre-set term rather than spread payments over a lifetime.
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In addition, the vast majority of those who choose to take income from their VAs are not annuitizing, but are using riskier systematic withdrawal plans (SWPs), depleting the average VA issuers assets under management by tens of millions of dollars each year.
Certainty Over Life
In actuarial terms, lifetime annuitization transfers the risk of outliving ones savings from the investor to the insurance company. However, many retirees (and their heirs) fear that they may die sooner than expected and the insurance company will take the fruits of a lifetime of labor. Additionally, worries about unexpected needs for cash after retiring make turning over a major asset to an insurance company an unattractive option in the eyes of these retirees.
In the FRC study, “Opportunity of a Lifetime: VA Income & Product Trends,” participant firms of all sizes reported that the majority of VA contract owners who annuitized their contracts elected non-life contingent, period certain payout options over all types of lifetime payout options. These latter options include straight life, life with period guarantee, life with refund, joint & survivor straight life, and joint & survivor with period guarantee. (See chart 1.)
Lifetime options were chosen by only 28% of clients at large VA firms, 37% at medium-sized companies, and 40% at the small firms FRC surveyed.
For commission-based financial advisors (and advisors are often the driver behind these decisions), loss of control is equivalent to loss of future compensation. Thats not to say that all reps make their recommendations based solely on financial self-interest. However, the irrevocable nature of annuitization can make other options preferable to intermediaries, offering them the opportunity to reposition the assets down the road.
Systematic Withdrawal Plans
Rather than annuitizing, and guaranteeing a lifetime income stream, VA owners prefer by a wide margin to access their annuity assets through systematic withdrawal plans. Under a SWP, annuity shares are liquidated to provide regular payments that are either a specified dollar amount or a percentage of the investors account value.
According to FRCs study participants, new SWPs outnumbered annuitizations by a ratio of 30-1 during the first quarter of 2001, compared to 20-1 in 1999. SWP initiations rose nearly 40% from 1999 to 2000, and increased 62% from 2000 to the first quarter of 2001 (annualized). (See chart 2.)
Many financial intermediaries have limited knowledge of the intricacies of annuitization, including the various payout options. SWPs are more readily understood, as reps routinely use them with their mutual fund clients. And SWPs leave a clients remaining VA assets free for reinvestment (and an additional commission) later.
However, the convenience of SWPs comes at a steep price. Unlike annuitization, SWPs represent a steady, uncontrolled drain on VA assets. To get a sense of the potential impact in terms of dollars, we calculated the first-year asset withdrawals per company, using the average number of SWPs opened and the average value of deferred VAs reported by the same companies at the beginning of each period.