Will The 'For Life' Concept In Annuities Last?

The concept of offering annuities “for life” is getting a lot of buzz right now. But is the for life concept really for life? That is, is the use of annuities for lifetime income planning purposes here to stay?

There is certainly development activity in this area. For instance, in the last year, the “guaranteed minimum withdrawal benefit for life” (GMWB for life) feature has stirred “for life” interest in many quarters, starting with variable annuities last year and now moving into index annuities (IAs). Meanwhile, sales of lifetime immediate annuities are up at a few insurers (e.g., American National Insurance Company), and even lifetime annuitization is getting some play at a few carriers (though not industry-wide).

Furthermore, insurers are bringing out more software tools and programs that aim to help advisors set up client income plans for life that include use of annuities.

Advisors have told NU they’re intrigued by the growing “for life” focus, and they are considering including it in their practice. But they have reservations.

“Will clients really be interested in buying and investing in solutions that run for their entire lives?” they ask. Or, is this a flash in the pan–something that will wane when the marketing stops and or when the stock market rebounds for a long period?

On a scale of 1 to 10, with 10 the highest, Richard W. Duff, an insurance agent in Denver, Colo., says the insurance industry averages 4-5 where “for life” development and commitment are concerned. The ranking is not higher, he says, because industry and government still need to make changes that will support and facilitate lifetime planning and use of annuities for lifetime income purposes.

“But we’ll get to 10,” he predicts, once the changes are made (see sidebar).

“As more people live longer, become frail and run out of money, the subject will become more fertile and necessary for people to confront,” Duff explains. The immediate annuity will play a key role in this, he continues, because it provides income that can’t be outlived.

Mark Schwarzmann, president, insurance, annuities and product distribution for Ameriprise Financial, Minneapolis, ranks the “for life” concept at 6-7 out of 10.

Producers who have been selling VAs are embracing the concept, he says. So are producers who are returning to the annuity world–expressly because VAs offer living benefits and now “for life” living benefits.

Even if the market goes up for a long time, “for life” products will still be attractive, Schwarzmann maintains, because “people do age, and they naturally shift from accumulation to distribution.”

In fact, he says the annuity industry will need to work hard to keep up with the boomers who are making this transition.

Boomers are entering retirement without traditional defined benefit pensions and with less certainty about Social Security, he points out. Further, it is unlikely they will have forgotten the losses they suffered in the stock market in 2000-2002. “These people know the value of guarantees.” They will not go back into a full accumulation mode, comparable to that in the 1990s, even in an up market, he predicts.

Another positive Schwarzmann sees is the recent enactment of the Pension Protection Act of 2006. “That opened the door to offering advice inside of pension plans,” he says, adding, “This is great time for the annuity industry (in the ‘for life’ market), because we have solutions.”

Schwarzmann believes the strongest products for this purpose are the living benefit annuity products, such as the VA GMWB for life. These designs are getting “better than ever,” he says. For example, the RiverSource Annuities offered by his company pair the feature with mandatory asset allocation, auto rebalancing, and auto step-ups.

Also, GMWB for life products offer liquidity, he says, adding that this appeals to consumers and advisors who don’t want to lose control. Congressmen and senators like it too, he says, noting that when they learn about it, “you see the light bulbs go off. They see this as a better match to the need…the big bad insurance company is not going to take all the money.”

Traditional lifetime annuitization doesn’t have such liquidity, he says. And while annuitization with commutation does have it, such products are harder for consumers to understand, and they have a “stigma about loss of control of the asset, whether true or not.”

Richard Lane, director-individual annuities sales and marketing at Standard Insurance Company, Portland, Ore., puts the concept’s development at 7 on a scale of 1 to 10.

“This is not flash in the pan,” he says. The distributors and the companies are focusing much more on distribution products, because retirement today is not the same as it was in the past, he explains.

People in their 60s may still be working and may think of themselves as if they are in their 40s, Lane allows. So, some do have a hard time thinking about lifetime immediate annuities or locking up their money in lifetime income plans since they are “at such a young age.”

But at some point, Lane continues, these people are going to want to access the money they’ve accumulated, and they will use annuities as one way to do that.

Annuity companies are gearing up for this now, Lane says. He points to the GMWBs for life as an example.

His own company is innovating in the lifetime area, too. In a few weeks, Standard will debut a commutation feature on lifetime fixed annuities.

Up to now, Standard, like other insurers, allowed commutation only on period-certain annuities, Lane notes. But now it is offering it with lifetime products, too, so those policyowners can access their money if they wish, Lane says. Unlike Schwarzmann, he does not view this design as unduly complicated. The owner withdraws money by commuting the annuity payout to the present value, and then the monthly payment drops to a new level, he says.

Ann Hughes, senior vice president and head of business development for ING annuity distribution, Dallas, Texas, rates the annuity industry as being an 8 on a scale of 1 to 10.

“We’ve come a long way in being able to explain (the longevity risk), remove complexity, and meet the need,” she says.

Further, people do buy lifetime products, Hughes indicates. At ING, for instance, in 2006, 23% of the company’s annuity sales are in VAs that have the GMWB for life feature. And 77% of ING’s annuities are issued with either an income benefit (that the client can access after a waiting period) or the GMWB for life.

Her view is that the VA GMWB for life feature will become increasingly prevalent in the “for life” marketplace. “More advisors understand it (than other lifetime options), and they will gravitate to it and be more comfortable with presenting it.”

What’s more, annuity products are getting “better and better” in their ability to meet lifetime income needs, she says. And the marketplace is ready. For instance, “advisors are saying their clients fear they will outlive their money in retirement…No other retirement vehicles out there can assure this, because this is truly insurance.”

The “for life” products will continue selling, whether the stock market goes up or down, she predicts, explaining that design favors this. For instance, ING’s GMWB for life feature locks in a VA’s highs during an up market on a quarterly basis, she says. As for market lows, clients know what their guaranteed minimum income will be.

There is a cost for GMWB for life, Hughes points out, and it’s not for everyone. “It’s for those who want to be sure some portion of their money is protected and insured.”