In Todays Market, VAs Push Safety
Whats the fashion statement for todays variable annuity design?
If you doubt it, check this out: A review of several products arriving at National Underwriters products desk in recent months shows that many VA insurers have added features to their VAs that aim to heighten the sense of safety that prospective buyers feel about VA investing.
Further, the way VA executives talk about these new features and products shows they are veering towards the bulkhead of predictability. Their comments are awash with references to safety, protection, comfort, security, reassurance, and so on.
The aim, say designers, is to give consumers the confidence to invest in a VA, although the market is volatile.
Some insurers are doing this by offering a new type of living benefit–a return of premium guarantee–with their VAs. This feature guarantees the principal after the owner has had the policy for a number of years.
ING began offering such a feature with its VAs as early as last October. Available for a fee, it guarantees return of principal after 10 years, if certain conditions are met.
“We view this as insurance,” says William Lowe, senior vice president-investment products distribution in INGs Des Moines, Iowa office.
“Insurance?” Thats right, says Lowe, “insurance.”
With todays volatility in the stock market, insurance is not a bad word, he contends. “People know what insurance does,” he explains. “It provides protection against catastrophic loss.”
That is what many buyers are looking for today, he says. This feature will especially appeal to buyers who are afraid their VA investment might go south, he predicts.
When attached to a VA, he says, owners can participate in the equities market, but with the comfort of having underlying guarantees.
“It protects against catastrophic loss (i.e., the loss of principal after several years of VA ownership), the way homeowners insurance protects against catastrophic loss to ones house,” he maintains.
People today can and do relate to that, Lowe says. They dont necessarily want the guarantee to pay off, but they do want “the protection and comfort it provides, over the long term,” in event of a steep market downturn.
A side benefit: “The feature is a way VA insurers can differentiate their products from mutual funds,” he says.
Pacific Life has also responded to investor concerns about potential market losses. Just last month, the Newport Beach, Calif. insurer debuted a “Guaranteed Protection Advantage” rider–a 10-year VA option aimed at helping protect client investments, regardless of market conditions.
Available on any VA contract anniversary for 10 basis points a year, the GPA provides 100% protection of all purchase payments in the first four years. Subsequent payments through year 10 receive protection on a declining schedule. Then, on the 10th anniversary, if the VAs value is less than the amount guaranteed, Pacific Life will make up the difference.
“With this years significant market uncertainties, it became clear that we need to further offer clients safety and guarantees for their investments,” says Dewey Bushaw, senior vice president-sales in Pacifics annuities and mutual funds division.
–Withdrawals in the 10-year period reduce the amount guaranteed.
–Owners must stay 100% invested in any one of five portfolio optimization models, Pacific Lifes asset allocation program, or dollar cost average from a fixed option into a portfolio optimization model for all 10 years. (Owners can switch between models.)
–On contract anniversaries, clients can lock in gains by terminating the rider and repurchasing it, for a new 10-year-term, at the increased contract anniversary value.
–After year 10, clients can renew for another 10 years, subject to certain limitations.
The word, from several agents and marketers, is that the protection benefits are popular with consumers. In fact, USAllianz Investor Services, Minneapolis, attributes its own VA protection benefit–offered in the USAllianz Alerity VA–with contributing to the 40% sales increase this product had in the last three months of 2001.
The feature provides owners with a 5% safety net, says the insurer. “Investors receive the upside potential of the market with an annual 5% increase on their protection benefits. And the 5% guarantee is good, live or die.”
Further, investors in this VA pay no surrender charge on withdrawals after five years; and they can make 10% cumulative withdrawals, without charges, after the first year, the insurer says.
Death benefit guarantees are getting some safety-minded attention, too.
For instance, the “Breakthrough Death Benefit rider” from Allmerica Select, a division of Allmerica Financial, Worcester, Mass., “allows the VA clients not to be afraid of market corrections,” says Celeste Cardin, vice president and national sales director.
“Clients who purchase this rider can invest for retirement in the VA as aggressively as they want, without worrying about the impact on the value,” she says. It is currently available on Allmerica Select Reward, a bonus VA, and soon will be offered with other Allmerica Select VAs.
Heres how it works: The company reviews contract values daily and locks in a new death benefit any time the value increases 15% or more over the current lock-in value, Cardin says.
Since values are reviewed daily, “it creates opportunity every day for contract holders to capture market highs,” notes Robert Scheinerman, vice president-product management at Allmerica.
John Hancock, Boston, likewise has put financial security issues on the front burner in two of its newest VA death benefit options. One, the Enhanced Death Benefit, “provides a safeguard against market declines by guaranteeing that annuity assets will grow by at least 5% annually, regardless of market performance,” Hancock says.
The other, the Beneficiary Tax Relief, can increase annuity assets at time of the VA owners death, thus leaving beneficiaries with more money to pay taxes or funeral costs, according to Hancock.
For instance, if the owner is age 69 or younger, the tax relief option will pay 40% of contract earnings as the tax relief benefit. This amount is added to the annuitys account value to determine the total amount paid to heirs. (Note: The relief benefit percentage declines when death occurs at older ages.)
Owners who want to “go one step further in guaranteeing their beneficiaries financial security,” can combine the options, Hancock says. “In this way, clients can maximize assets left to heirs, whether they die in an up or a down market.”
One glance at the new VA from MONY Life Insurance Company of America, New York City, shows the safety bug has also bitten designers who build all new VAs.
Called MONY Variable Annuity, the MONY product does offer state of the art VA investment features. For instance, it has 35 subaccounts from nine money managers, an asset allocation and portfolio balancing program, and dollar cost averaging services.
But it also offers various state of the art guarantees: a guaranteed minimum income benefit, an earnings increase death benefit, and a guaranteed minimum death benefit, a guaranteed interest rate account, and a nursing home waiver.
Whats the rationale? The product is designed “to help a broad range of clients more effectively meet and manage their financial needs, regardless of life stage or external market climates,” explains Richard E. Connors, senior vice president and head of the annuities division.
Some companies are even updating their VAs investment choices with safety in mind. One example is Sun Life Financial. This Wellesley Hills, Mass. insurer has just added two new asset allocation models to its Futurity line of VAsand both models are “conservative choices,” says the insurer.
One, Capital Preservation, is “designed for investors concerned with safety of principal and who do not want to bear the risk associated with market participation.” The other, Capital Preservation Plus, is for those “seeking safety of principal along with a high level of investment income.”
They join four existing models–Conservative, Moderate, Aggressive, and Total Equity.
Why two more conservative models? They “provide increased options for more risk averse investors,” says Tim Highland, assistant vice president-retirement products and services.
Reproduced from National Underwriter Life & Health/Financial Services Edition, February 11, 2002. Copyright 2002 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.