with sales on the increase and a boomer-oriented market more interested in generating and managing retirement assets, annuity issuers are crafting some inventive solutions. It’s a good market for annuity sales. LIMRA reported that total U.S. sales of individual annuities were $63 billion during the first quarter of 2008, an increase of 9 percent from the first quarter of 2007. Results varied among the types of annuities: Fixed products were up 31 percent, variables up 1 percent, and indexed fell 2 percent.

Industry observers point to several possible causes for the sales increase, including stock market volatility and low rates on fixed-income investments. Another reason, however, is the ongoing improvement in annuities’ features and benefits. Just a few years ago, the personal finance media usually considered annuities at best a lousy investment and more likely a rip-off. That attitude is changing, though, as baby boomers and reporters have noticed the contracts’ protection and guaranteed income features. Insurers have responded by introducing new features at a rapid rate. “I’ve been in the business over 20 years and I can’t recall a time when the cycle of product development and new product introductions has been so short,” says Tom Mullen, senior vice president of marketing for variable annuities with John Hancock.

The issuers’ perspective
Insurers have focused heavily on income- and withdrawal-benefits for much of the past year. Rob Grubka, vice president, Individual Annuities for Lincoln Financial Group, says the company continues to focus on retirement income and providing lifetime income to clients. Similarly, Mullen says Hancock has focused its product development efforts over the past 18 months on developing and refining their contracts’ withdrawal benefit.

It’s not just the number of pending boomer retirements that’s driving the changes, though. It’s also approaching retirement planning with a different attitude. Mullen has observed that investors’ thinking changes as their focus shifts from accumulating assets to generating and managing income. For example, many pre-retirees hold assets with multiple advisors and financial services firms. That approach works during the accumulation phase, but it can reduce efficiency when it’s time to start taking distributions.

“The mindset changes and there’s a crisis of confidence,” he says. “They don’t know how much they’re going to make in retirement. It causes them to rethink how they relate to advisors.” One consequence of that adjustment, Mullen believes, is that clients seek out a deeper relationship with their primary advisor and begin to consolidate their assets. The goal of the consolidation is to provide a more accurate picture of lifetime income, and the process can lead them naturally to annuities.

Product developments
Product features continue to evolve. Grubka points to LFG’s optional Guaranteed Lifetime Withdrawal Benefit (GLWB) rider, called Lincoln Lifetime Income Advantage, which is available with the American Legacy and Choice Plus variable annuity product suite. The features include guaranteed lifetime withdrawals, automatic annual 5 percent enhancements, automatic annual market step-up, and a step-up to 200 percent of the initial guaranteed amount at 10 years or age 70. LFG has also introduced an inflation-adjusted immediate annuity with the annual income benefit tied to the Consumer Price Index.

Mullen says that Hancock launched its Income Plus For Life product in 2007 with a unique set of benefits. In addition to the standard features expected from a withdrawal benefit, such as lifetime income beginning at age 60, and market participation through step-ups, the annuity includes a bonus. “It’s an automatic bonus that applies in years when no withdrawals are taken,” Mullen says. “It’s basically a reward for those who are waiting to take income later to insure that the benefit base is increasing at a steady pace, regardless of market volatility, and the future income will be higher. If you took income at age 70 (after waiting 10 years), your income base would be at least double your investment. The design mimics the behavior of our prototypical customer who buys our annuity around the age of 60 and takes income around the age of 70. So if you can think of it like an IRA rollover, when the required minimum distributions start at age 70, that’s what this product was geared for.”

Hancock plans to introduce another contract feature in mid-June, Mullen says. The company will upgrade its step-up (market participation) program, increasing it from an annual frequency to a quarterly frequency.

MetLife recently enhanced its Lifetime Withdrawal Guarantee rider, according to Joe Jordan, senior vice president for individual business marketing at MetLife. The company’s VA rider now has a 7.25 percent roll-up for this living benefit rider. This means the clients’ benefit base, determined initially on the initial investment, would more than double in 10 years if they do not take withdrawals during that time.

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.