Some insurers are bucking the trend by going riderless

Riders are often the fast fix for an insurance policy in need of a tweak. But they increasingly are becoming the hub for product innovation.

This innovation can be substantial. It may involve product patenting, for instance. A recent example of that is the decision of American Express Financial Group, Minneapolis, to file for a patent on a new variable annuity rider. There is a feature in the rider that is unique, the company explains.

Other rider innovations seek to hike up competitiveness and/or customization capabilities of existing products. That is widely seen as saving the time, money and effort of crafting all-new designs while still moving deeper into the insurance design frontier. The modern version of this is to broaden or enrich what the base contract does or offers, as will be seen below.

The above is not to say that riders are the only place for insurance innovation today. Some insurers still innovate from the ground up.

For instance, Jefferson National Life Insurance Company, a Dallas subsidiary of Inviva, New York, recently unveiled Monument Advisor, a from-scratch VA for fee-based advisors that, not coincidentally, has no riders at all. In a sense, the innovation was simplicity, so the product also has no mortality and expense charges, no surrender charges, and no front loads. (Instead, it charges a flat insurance fee of $20 per month, no matter how much a client invests, says Patrick D. Ferrer, national sales director.) The product is backed by an all-electronic platform for issue, maintenance and administration, says a spokesperson.

Also, the Phoenix Companies, Hartford, Conn., has debuted a ground-up variable universal life policy, Phoenix Express VUL, which innovates around simplicity, too. This contract offers face amounts of up to $1 million without medical exam and is structured to facilitate underwriting decisions in a few hours. To accomplish this, the company uses a short application, and permits underwriting without medical exam, depending on the medical answers on the app.

Once again, there are no riders involved in this build. That, too, is not coincidental. It’s part of the simplification process, a Phoenix spokesperson explains.

Still, riders do dominate today’s insurance development limelight.

American Express Financial says it filed for a patent on the Accumulation Protector Benefit rider, mentioned earlier, because the rider’s “80% step-up feature” is unique to accumulation benefits. Specifically, the rider guarantees that, after 10 years of investment, the policy owner will receive the greater of: the original contract investment (adjusted for withdrawals), the contract anniversary value, or 80% of the highest maximum anniversary value (adjusted for withdrawals).

This is for clients who want to protect their original investment while being able to participate in market growth, says Lynn Abbott, vice president-national sales and strategic alliances, in a published statement. It enables the company to position the VA (with the rider) as an alternative to fixed annuities or indexed annuities, adds the company.

Other insurers use riders to keep fresh ideas fresh–or fresher–and to achieve market differentiation along the way.

Take John Hancock Annuities, Boston, andGuardian Life Insurance Company of America, New York. This spring, both unveiled new versions of the so-called guaranteed minimum withdrawal benefit rider, now a popular VA add-on.

As with original GMWBs, both riders aim to enable owners to receive a predictable stream of payments in retirement without annuitizing. But both are also broader and deeper than original types of GMWBs.

Hancock terms its new GMWB a “next-generation” rider. That’s because the rider–Principal Plus for Life–includes enhanced benefits and features not found on the insurer’s original GMWB. It provides a guaranteed income clients won’t outlive, without the complexity and limitations associated with traditional annuitization,” explains James R. Boyl, president of John Hancock Annuities.

The rider does this by allowing withdrawals up to 5% of the initial annuity payment each year for 20 years, regardless of market performance. In addition, it guarantees the payments for the life of the owner (or older owner, if a jointly owned contract) starting at age 65, says Hancock. An automatic bonus adds 5% more a year in any of the first 10 contract years where no withdrawals are taken, up to age 80. If markets rise, an optional step-up allows lock-in of gains every 3 years.

At Guardian, the new GMWB–AssetAccess–broadens the benefit, too. For instance, it enables owners choosing 1 of 4 specified asset allocation models to maintain a steady stream of withdrawals even if investment performance is flat or down, says Bruce Long, president of Guardian Investor Services LLC, Guardian’s VA distributor.

In addition, for each year of no withdrawals during the first 5 years, the guaranteed withdrawal benefit increases by 6% of premium payments made and not withdrawn. (In single-premium contracts where there are no withdrawals for the 5 years, the guaranteed withdrawal benefit will increase by 30% of initial premium payment.) Also, there is a bonus, which pays 2.5% of initial premium when there are no withdrawals in the first 5 years; and there is an optional step-up which, every 3 years, would increase the rider benefit to the current contract accumulation value. (Note: If total withdrawals in a year exceed the rider benefit, the benefit is reset.)

A similar type of expansion is occurring in riders for life insurance contracts.

Consider the Benefit Extension Rider for variable universal life policies at Midland National Life Insurance Company, Sioux Falls, S.D. This rider allows policy owners to maximize VUL guaranteed zero cost loans, according to the insurer, by assuring that the VUL won’t lapse when substantial distributions have been taken, despite poor market performance. Available free of charge, the rider is being applied retroactively to Midland’s in-force single-life VULs. Owners can activate it at age 65+, but waiting until age 75 allows for larger available distributions, the insurer says. (Upon election, the VUL death benefit may decrease substantially, Midland says.)

Two new life insurance riders from Columbus Life Insurance Company, Cincinnati, Ohio, also are of the expansion mode. Both are designed for affluent personal and business clients.

One of those riders, Capital Transfer II, provides an enhanced no-lapse guarantee for a universal life policy. The insurer says it guarantees the death benefit for life if there are no loans or withdrawals and the specified premium test has been met. It can be combined with accelerated death benefit options to allow early access to benefits without affecting guarantees. The Enhanced Cash Value Rider, meanwhile, provides higher cash surrender values in the early years of a UL or VUL policy.

Riders can save insurance innovators time, money and effort while still moving deeper into the insurance design frontier

Some companies have started innovating with guaranteed minimum withdrawal benefits in VAs