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Roll with the changes

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Bad press and declining inflow rates continue to hamper certain segments of the annuity industry. The National Association for Variable Annuities recently reported a 50 percent decrease in variable annuity net flows in 2005, and Notice 05-50 caused more chaos than guidance in the equity-indexed space. As if this wasn’t bad enough, due to the abusive sales practices of a small number of unscrupulous individuals, the regulatory spotlight continues to shine on the issue of client suitability.

But far from accepting the Chicken Little-like predictions of the financial media, carriers are responding to the tough environment by developing generous and flexible annuity rider options. Whether it’s lifetime income benefits, withdrawal benefits, bonus products or no-surrender features, these customized solutions offer more choice for senior advisors when addressing the income and planning needs of their clients.

In recognition of one such need (that women generally outlive men and run a greater risk of financial peril), New York-based The Guardian Insurance and Annuity Co. has released two new living benefit riders, Spousal AssetAccess and Lifetime AssetAccess, to help advisors help their clients – and their clients’ spouses – supplement lifetime income.

“We commissioned a study, and one of the findings was that annuity living benefit riders are significantly more popular with non-married women than with married women,” says Bruce Long, president of The Guardian. “We saw this as an under-served market. The spousal need in the annuity arrangement was left uncovered.”

Spousal AssetAccess, Long says, is one of the few guaranteed minimum withdrawal benefits that extend the guarantee to a spouse. The rider allows withdrawals to be made or guaranteed payments to be received as long as either spouse is alive.

As most advisors know, living benefits riders like those offered by The Guardian are not the only annuity features available, but they are among the most prevalent. Living benefit riders provide certain guarantees to annuity contract owners, most often in the form of a minimum value to either reinvest or annuitize. The three main categories are the guaranteed minimum accumulation benefit (GMAB), the guaranteed minimum withdrawal benefit (GMWB) and the guaranteed minimum income benefit (GMIB).

The GMAB lets the client invest for growth potential while guaranteeing the contract’s principal at the end of 10 years. The GMWB gives the client the flexibility to make periodic withdrawals until the principal, at a minimum, is returned to the contract owner. The GMIB allows the client to annuitize his contract at some future point, typically at least 10 years after issue, and receive the greater of his current annuity value or premium increased by some interest factor.

In November, New York-based AXA Equitable introduced two new living benefit options, as well. Both are designed to address the longevity and income issues their clients face and are indicative of the type of features that annuity carriers are now offering.

According to the company, one product, the “benefit base reset,” allows a five-year step-up of the value of both the GMIB and guaranteed minimum death benefit so the client can take advantage of market appreciation. This allows him to lock in increases to his benefit over and above the roll-up guaranteed by the GMIB. This higher amount then continues to accrue at a guaranteed percentage.

In addition, the no-lapse guarantee in the company’s GMIB means that no matter how poorly the market performs, if the accumulated account value falls to zero, the GMIB will automatically be activated, providing a needed income stream for the client.

Last January, AXA also introduced its Retirement Income for Life variable annuity. The company says it’s meant to bridge the gap between the accumulation of wealth and distribution of payments. More specifically, the variable contract itself provides many of the features that would normally require separate, additional living benefits to be purchased.

“It is believed to be the first stand-alone product to offer access to account value, growth potential and a ratcheted income base,” says Bob Goldenberg, AXA’s vice president of annuity marketing and product development. “[It offers] the ability both to add money to the contract before withdrawals begin and to pass unused values to heirs.”

But despite the increasing popularity of living benefits, criticisms have been raised. Detractors point to the high cost associated with many products and the fact that some features are not needed and will be used rarely.

“We absolutely agree that living benefits are often expensive,” Long says. “Many of the bells and whistles either overlap or will never be used. It’s like the hipbone connecting the thighbone. The client can’t collect the withdrawal benefit and the income benefit at the same time, and he can’t collect the income benefit and the death benefit at the same time (he can’t collect the income benefit because he’s dead). It’s the belt and suspenders clich?(C). Advisors and clients need to be aware of this before purchasing an annuity.”

“We employ an advice-driven model, under which our financial professionals are trained in conducting fact-finding sessions with clients,” Goldenberg says. “The fact-finders allow the financial professionals to determine which features are appropriate for the client’s needs. Retirement Income for Life illustrates that. Its primary focus is providing guaranteed income payments for life. It’s a product that is relatively easy to understand and easy to explain.”

The current frenzy to develop living benefits that meet flexibility and suitability demands appears to be here for some time. Indeed, so-called second-generation rider options and hybrid living benefits are already rolling out. For senior advisors who once dismissed annuities for their high expense and rigid structure, it might be worth another look.