“The income planning side of variable annuities is going to be huge,” predicts Laurence Greenberg, president of Jefferson National Life, Dallas.
Long used to help people accumulate money, VAs increasingly will be used to provide a monthly income to people who no longer receive a monthly check from working, Greenberg maintains.
People will intentionally buy the VA for the purpose of annuitization, he predicts.
Boomers, in particular, will be experiencing a lot of anxiety as they approach retirement, he explains. They will face Social Security issues, new drug plans, long term care, longevity, rising costs and other challenges, he says, and will be realizing that “I am spending my money, not saving. How can I make sure I don’t run out of money?”
The VA is one part of the solution, say many industry executives. It answers the question, “How do I get paid in retirement?” says Greenberg. This article reviews how VA manufacturers are configuring their products to do that more effectively.
Design for simplicity and transparency. VA firms are rushing to find ways to make the product as simple to understand and use as possible. That includes transparency, too, in fees, costs and features.
“We will see more plain vanilla products,” predicts Greenberg. They will have clarity in pricing but still offer diversified portfolios so people can keep growing their assets while in retirement. If the fees in the products aren’t too high, this will have strong appeal, he says.
His own company, a subsidiary of Inviva, New York, debuted a low-cost VA for the accumulation market last June but now is looking at applying the same principles for immediate annuitization. (The earlier VA, Monument Advisor, has a flat $20-a-month insurance fee. Designed for distribution by fee-based advisors, it has no surrender charges and pays no commissions.)
Consumers get very concerned about handing over a chunk of money to an insurance company, Greenberg explains. “This is an issue of control and a need for strong consumer value.”
Therefore, for single premium immediate annuities, “there needs to be pure transparent value to the consumer and advisor,” he says.
Other VA executives also see simplicity and transparency as going hand in hand. “The trend is: more user friendly, easier for clients, and no bait and switch,” notes Robert Scheinerman, senior vice president-marketing at AIG/SunAmerica Retirement Markets, Los Angeles. “[We want to be sure that] you get what you think you got.”
One example: AIG decided it will not change fees when a step-up occurs under terms of its GMWB rider for VAs. “We think it’s important that this fee be the same as at policy issue,” Scheinerman says.
Over at AXA Equitable, “we explain exactly how the VA features work and the costs,” says Steven Mabry, vice president-annuity development, New York.
Simplicity in income products is also important, he notes, but cautions that most products will still have some complexity. That’s where the advisor comes in, he says.
Build for advisor involvement. Advisors are critical to the successful use of VAs for income planning, say Mabry and most other VA executives. They are needed to show clients how the income features work and how they meet client needs, Mabry says.
For instance, “who determines what percent of the clients’ income plan the VA should occupy?” asks James R. McInnis, president-annuity distribution at ING in the West Chester, Pa., office. The answer is the advisor needs to work with the client on this, he says.
About four or five years ago, a number of producers stopped selling VAs, McInnis notes. The complaint was that VAs were too complex and time-consuming, and they involved too many regulatory challenges, he recalls. That exodus from the VA distribution channel was one reason for development of simpler products–to bring the producers back, he says.
So, the simplicity trend and the presence of advisors are now closely entwined, right along with transparency in fees and features.
VA developers increasingly view the advisor as key to helping clients develop income plans and make product choices. If, say, a client complains that a product’s fees are too high, “it is up to the producer to show the client the value,” says McInnis.
Firms also are looking to advisors to convey the VA income story.
The tools advisors traditionally have used for income planning include asset allocation and systematic withdrawal, observes John M. Kawauchi, vice president-product management at Nationwide Financial, Columbus, Ohio. “But those tools can’t guarantee an income for life. Only an insurance company can guarantee 100% that people won’t lose their money.”
Today, companies are relying on advisors to deliver that message. “The advisor can direct clients [in how] to use the income side of the VA to cover the portion of their retirement expenses that are set,” says Scott M. Schumacher, associate vice president-product management, Nationwide.
The advisor’s asset management role is also important, says Patrick Ferrer, national sales director at Jefferson National. This requires developing solutions to help clients build an income. It also requires that agents stay involved–with compensation–whether the clients’ income comes from only a VA or from a blend (VA, tax-free bonds, stocks, real estate investment trusts, etc.), he says.
Focus on ‘pensionization.’ Companies are nudging advisors to create “income solutions” that serve the same function as the old traditional defined benefit pensions, Ferrer explains.
He calls this the “pensionization” of client assets, not annuitization.
Consumers and advisors generally have not wanted to annuitize, Ferrer explains. “But they do want some kind of guaranteed income stream,” he stresses, and, if they do not have a traditional pension, they need assistance setting up this stream.
The pensionization process refers to finding solutions (using VAs and fixed annuities among other products) that create a predictable monthly income.
At ING, something similar is happening. “We talk about ‘creating your personal pension’ or ‘building an income you cannot outlive,’” notes McInnis.
The emphasis is on solving the needs of the customer without attaching the word annuitization, says Ann Hughes, senior vice president and head of business development at ING in the Dallas office. ING also emphasizes developing solutions that give people what they want–e.g., flexibility, access, ability to suspend benefits, etc.–rather than names of features.
Refresh annuitization. Even though some annuity experts don’t like the word annuitization, it remains a working concept for income planning. Some developers are even innovating around this concept. For instance, Lincoln Financial Group, Hartford, Conn., recently has enhanced one such innovation it debuted a few years back. This is i4LIFEAdvantage, a patented VA rider that has both withdrawal with annuitization characteristics.
The base rider provides clients with an “access period” during which regular (and extra) withdrawals are made and during which liquidation is allowed. This access period can be shortened or lengthened at will, but once it ends, the product then makes payments for life. The product is being sold to people in their 70s in the high affluent market who are ready to start drawing down income, points out Heather Dzielak, annuity line business leader. The average account size is $200,000.
The new enhancement targets a younger client–the retiring baby boomers. It helps clients “see” their income needs five to 15 years ahead, says Dzielak, noting the purpose is to help them build toward a future guaranteed income stream, the amount of which they know today. This is a minimum guarantee, she stresses, adding the money stays invested so “it is a worst-case benefit.” The feature is also revocable, she says, adding revocability is important to boomers who like to maintain control and to advisors who may want to move clients into a new product category later on.
Provide living benefit guarantees. In VA circles, living benefit guarantees take center stage in income planning discussions. In fact, 85% of VAs sold today offer such benefits, according to Morningstar research cited by Mark Phelan, senior vice president-individual investments at Nationwide Financial, Columbus.
Introduced a few years ago, living benefits features vary considerably. But most share this element: They ensure that the policy owner can access certain policy values, regardless of market performance.
That’s important, says Robert Goldenberg, vice president-annuity marketing and product development at AXA Equitable, because the guarantees free people to invest more in the market than they otherwise might. Many older people will find that particularly valuable, because they need to make up for market losses experienced in the early 2000s, he says.
The guarantees also help people plan for other retirement-related risks, such as longevity and interest rate change, Goldenberg says. “We, the insurance company, manage these risks on behalf of the client who can’t.”
For income planning, two living benefit structures stand out: the guaranteed minimum withdrawal benefit for life and the guaranteed minimum income benefit.
Develop GMWB for life options. This is a for-cost option that guarantees the owner can receive a minimum monthly amount for life–as withdrawals, not annuitized payouts. The remaining VA account value continues to grow tax deferred. (If withdrawals beyond the minimum are made, the monthly withdrawal is adjusted accordingly.)
This is for clients who want income now and who think they may need it for their entire lifetimes, says Hughes of ING, which offers the LifePay GMWB.
The advantage, she says, is that, for 50 basis points, the client gets immediacy (the income starts right away), flexibility (the client can start and stop withdrawals at will), and no lock-up of assets (the client doesn’t have to annuitize to get income).
It’s for clients who want income they can’t outlive, want to have it now and want to continue to control the assets, Hughes continues, noting that’s an especially strong play for baby boomers, who often look for an income stream right now.
GMWB for life is a good alternative for someone who may want and need to annuitize but who is not yet ready to give up control of the assets, adds Schumacher of Nationwide, which is debuting its first such option. (Called L-inc, the option guarantees withdrawals for life of the owner–and spouse, if the spousal option is added–of up to 7% of the income base.)
These features give clients real choice, he stresses. The GMWB for life provides more asset control than annuitization and a monthly income that’s guaranteed, he explains, while traditional annuitization provides a higher monthly income than under GMWB for life but no asset control.
It also has advantages for advisors–they get compensation on the assets remaining in the VA, and they still can advise on moving the money around, Schumacher says.
GMWB for life will be a “bridge to annuitization,” he predicts. Over time, people will get used to that monthly income flow, he explains. “Then, to maximize the income value, they’ll choose to annuitize.”
Phoenix Companies, Hartford, Conn., is so convinced of the value of GMWBs to consumers that it has developed a full GMWB suite. It has two traditional GMWB riders (paying 5.25% and 7.35%, respectively, of initial premium a year, with a minimum cumulative benefit of 105% of initial premium): the Lifetime GMWB, and the Lifetime GMWB for two (extends the GMAB to the surviving spouse).
Why such an extensive commitment? GMWBs have features boomers will need in retirement, contends Timothy Paris, vice president and actuary-annuity product development at Phoenix.
“Defined benefit protections are eroding, and most boomers are concerned with maintaining their standard of living as well as having peace of mind,” he explains.
Moreover, the features enable advisors to meet consumer demand and to be compensated for it via trailers on the VA.
The features Paris sees as most appealing to clients are: flexibility; the ability to stay invested; discretion on choosing when to take income; guaranteed income for life (via lifetime riders); and liquidity while taking income.
Furthermore, says Paris, like equity index annuities, GMWBs offer upside potential (via the VA subaccounts) with downside protection (via the guaranteed income stream). And, with the spousal rider added, it provides retirement security for both spouses, he says.
Develop GMIB options. The guaranteed minimum income benefit is the other living benefit that income planners use. The GMIB guarantees what the minimum amount of monthly income will be, once the policyholder annuitizes the contract.
At AXA Equitable, 80% of new VAs have the GMIB attached, reports Mabry. The cost is 65 bps, but that apparently is not a deterrent.
The feature targets the at-retirement person who has a significant amount of assets that he or she wants to guarantee, Mabry explains, noting the average ticket is $100,000. “People still remember the last two market corrections,” he notes. “They want to be sure they won’t take a dramatic loss if another correction occurs when they are retired.”
AXA Equitable also offers a GMWB, and plans to add a GMWB for life in May 2006, points out Goldenberg. Still, the insurer sees the GMIB as having very strong appeal and supporting greater use of annuitization.
Annuitization is still a tough sell, allows Drew A. Denning, second vice president-retirement income management at Principal in Des Moines, Iowa. “But if interest rates rise dramatically, say, to 8%-8.5%, we’ll see a stronger lift on the income annuity side.” The higher payouts will mitigate concerns about liquidity options, he predicts.
Increase innovation. VA providers need to continue innovating “directly or indirectly to support retirement security,” maintains Paris. An increasing number of developers feel the same. See the sidebar for some ideas currently in motion.
Ultimately, using VAs for income planning will require the industry to come back to focusing on the performance of the overall chassis, predicts Greg B. Salsbury, executive vice president, Jackson National Life Distributors, Denver.
The product should not be just an overpriced fixed annuity, he says. The cost structure needs to be lower, he continues, explaining this “will allow for greater income to the client” and also higher performance and greater transparency, too.
Advisors really are intrigued with income planning, adds Dzielak. They see it as an opportunity to grow their business and to retain existing clients, who will increasingly need this expertise. “It’s a huge opportunity.” Not taking advantage of it is also huge–a huge risk, she says.