New developments in the annuity market

Too good a deal?
The competition to improve annuity contracts helps consumers and gives advisors greater flexibility in matching clients and solutions. But could the race to improve benefits backfire at some point? On one level, complex products are becoming even more complicated. Tracking the variety of riders and standard features is now a part-time job for advisors. And while consumers gain from the contract improvements, the average buyer lacks the expertise needed to fully understand the offerings.

Mullen notes that some companies are developing “ever more aggressive benefits in order to gain a competitive advantage” in the market. Consequently, he believes the withdrawal benefit market is at a crossroads, in that some offerings of leading-edge companies are markedly more aggressive than the typical product of just a year or 18 months ago. On the one hand, to a consumer that might be very attractive. “But at what price?” he asks. “These annuities with withdrawal benefits are geared to help people in a retirement that could last 20 to 30 years or more. They will have to weather several cycles. Do the companies have the wherewithal in their financial and risk management programs to withstand turmoil in the markets — not just this year, but maybe five or 10 years from now, or even further out into the future?”

Advisors’ perspective
Among the advisors interviewed for this article, the response is uniformly positive towards the ongoing developments in annuities. Steven Lovell, a financial advisor with Forsyth Heritage in Walnut Creek, Calif., cites the diminishing periods between market locks as an example. “If you looked at annuity contracts with living benefits three years ago, many of them had the potential to lock at a higher contract value every five years,” he says. “Then it went to every three years and every year. Then it went every quarter and now there’s one contract out there that locks every day. Obviously, if you have more occurrences where you can lock a contract at a higher value, the expectation is that you’re going to lock in more times and have a greater account value.”

David Lesnick, an advisor with Sound Advice Financial Planning in Goodyear, Ariz. says that clients appreciate the policies’ retirement income enhancements. He cites the example of a $100,000 investment today from a 60-year-old client followed by 10 years of no growth in the stock market. (That’s not a farfetched scenario: the S&P 500 had a comparable performance for the past decade.) Although the policy’s cash value will show no capital growth, the client can grow the future income stream by delaying withdrawals. “Now when the clients says he wants to start taking distribution at age 70 for the rest of his life, he can start withdrawing 5 percent a year based on $200,000, not $100,000,” says Lesnick.

Annuities’ estate planning features have also improved, says Lesnick. He cites a case of a client who was living in Mexico and wanted to restrict her estate’s payouts to her adult sons after death. She did not want to return to the U.S. and hire a lawyer to implement the plan, so Lesnick searched for an annuity that would provide the restrictions she wanted. Lesnick found only one contract that would give her those provisions. “At the time, it was Jackson National, which had the only policy around that you could find restricted payouts,” he says. “Once she passed away, the proceeds would be divided in half for each of the children who would get payouts for the rest of their lives based on their ages and life expectancies at the time she died. Now you can find that degree of control almost everywhere.”

Looking ahead
More developments are on the horizon. Mullen says that the two biggest concerns uncovered in any poll about retirement are inflation and health care costs. Insurers recognize these concerns and will address them, he believes. “I think that there are likely lots of potential product developments that will target more inflation-linked income streams for retirees,” he says. “We’ll also see the convergence of a variable annuity and some type of either health care payments, long term care payments, or payments tied to a healthcare index — something of that nature. Inflation and health care are still the two major concerns of consumers that have attractive potential for the variable annuity products.”

The newest offering from Legacy Marketing Group and Investors Insurance Corp. could be an example of an emerging trend. According to a press release, the firms have introduced a new Gold Strategy, available with the PremierMark SE Series of fixed index annuities. This annual point-to-point strategy is believed to be the first in the industry to link to a commodity — in this instance, gold — rather than an equity index.

The Gold Strategy takes the closing price of gold, as published in the Wall Street Journal on the last day of the term period, and compares it to the price at the beginning of the term. The annuity is then credited with 100 percent of the gain in the price of gold, up to a predetermined cap, which is currently 9 percent (on the no-bonus product). The cap will never drop below 3 percent.

What’s next, an annuity with a link to the price of oil or gasoline? That might not be as farfetched as it sounds at first.