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April 03, 2006 at 08:00 PM
“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.
