The question on the minds of a lot of variable annuity professionalsin the field as well as the home office–is what to do about VAs?
That is, how should marketers position the product for the new post-recession, post-tax law change, post-stock market rout environment?
The answer has a lot to do with marketing the guarantees that many VAs offer, suggests John Fenton, a principal with the Tillinghast-Towers Perrin consulting firm in Atlanta.
It also has to do with positioning the VA as a product “uniquely qualified for income planning, as compared to certificates of deposit and mutual funds,” he says.
The VAs protection features and ability to pay the client a guaranteed retirement income should help combat any negative fallout that might arise from the recent tax legislation, says a new update report on the VA market recently released by Tillinghast.
According to the study, gross VA sales came to $30.5 billion for the first quarter of 2003, a 12% increase over the same period last year. Sales were $32.8 billion in the second quarter of 2003, up 10% over the second quarter of 2002 and up 8% over the first quarter of 2003.
So, “VA sales are chugging along just fine right now,” says Fenton. But, he adds, the greatest growth came from a handful of companies, while half of the VA companies surveyed actually had sales decreases.
Certain product features drove sales at the companies seeing the increases in 2003, says Fenton. These features include the guaranteed minimum income benefit (GMIB), the introduction of the guaranteed minimum withdrawal benefit (GMWB), the guaranteed death benefit, and the fixed account option (particularly in C-share VAs, which have no front-end sales loads or back-end surrender charges).
However, due to continued declines in equity market performance, some VA companies have now scaled back or even removed offerings in these areas, or they have increased prices to match increased exposure, according to Fenton.
Furthermore, the Tillinghast report points out that under the new tax law VAs will not have the same pass-through treatment of capital gains and dividends as mutual funds have, so mutual funds now have a slightly improved competitive advantage, especially in shorter holding periods. But for the longer holding periods, VAs remain attractive investments.
In previous years, Fenton points out, tax deferral was a key part of the VA sale. But today and going forward, marketers will benefit from focusing on the products unique protection and annuitization features. Here are some strategies he suggests:
Point out the VAs income features to clients whose qualified plans will soon roll over.
Rollovers represent about 60% of VA sales, about half of it from IRAs, says Fenton. “All that money is taxable, so the tax discussion doesnt really matter. But what does matter, especially for people who are not in the high-net-worth bracket, is to find a product that will ensure that their money will last the rest of their lives.” In short, for clients who need retirement income strategies, VAs can help.
In the nonqualified market, look for VAs with guarantees.
VAs can still be found that offer GMIBs with a 6% rollup guarantee on the account value when annuitized, Fenton points out. “If that is not available, you can still talk abut the VAs income features and how taxation is more favorable this way due to the pro-rata payout” of principal as well as taxable gain.
Point out that some variable annuitization features now offer more predictability in income amount.
Some levelize the payout annually, with the annual reset reflecting subaccount performance, he says. Others set a minimum payout amount.
Keep in mind that carriers are looking for new ways to hedge the risks associated with VA guarantees. Some are exploring hedging strategies.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 17, 2003. Copyright 2003 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.