After two years of depressed sales, variable annuity gross sales have rebounded in 2003.
Year-to-date variable annuity sales totaled $63.3 billion through June 2003, according to Tillinghasts VALUE Survey. That is an 11% increase over the same period last year.
This puts variable annuity gross sales on track to end the year at $124 billion, just slightly ahead of 1999 levels, though still well below the markets peak of $138 billion in 2000.
What is driving this recovery? Guarantees.
The variable annuity market has historically been very feature-driven. This continues to be true today. Consumers and distributors, skittish from the sustained market downturn and volatile equity markets, have migrated toward the guarantees offered in many variable annuities.
These guarantees range from the minimum credited rate in the fixed account to the familiar guaranteed minimum death benefits to the ever-changing guaranteed minimum living benefits.
Living benefits come in many forms. These include: the guaranteed minimum income benefit, which guarantees a minimum level of income at annuitization; the guaranteed minimum accumulation benefit, which guarantees a minimum account value at some point in the future; and the newest twist, the guaranteed minimum withdrawal benefit (GMWB).
Many companies characterize the GMWB as a “safety net.” It is targeted for moderate to conservative consumers perhaps nearing or in retirement. So how does it work?
The GMWB guarantees a minimum stream of income, equal to the return of the contracts principal (often referred to as the “protected amount”), provided it is withdrawn within specified limits over time.
Most current benefit designs limit withdrawals to 5% to 7% per year (noncumulative).
As with some living benefits features, the GMWB has no “waiting period” before the policyholder can begin taking the income stream. (However, one product increases the withdrawal limit to 10% if withdrawals are deferred until after the third policy year. The delay allows the company a period to charge policyholders for the potential cost of the benefit, and it also provides time for the market to recover from early drops in value.)
Keeping with the popular menu approach to variable annuity product design, the GMWB is most often offered as an optional rider, to be added at or subsequent to issue, for an additional charge.