“There has been an enormous amount of activity in the market for variable annuities, most especially with regard to the guaranteed income base that is offered in the form of a lifetime income benefit,” says Chris O’Shea, an advisor representative for Allegiance Financial Advisors, Jacksonville, Fla.
Many carriers have significantly reduced or eliminated the once generous credits they offered policyholders of VAs, he adds.
Only 12 to 18 months ago, insurers offered annual credits as high as 7% of the initial investment if the policyholder deferred making withdrawals for 10 years, O’Shea says., adding that the accumulated credits, based on the rule of 72, would typically double the initial investment within the deferral period. And, depending on the client’s age when distributions began, the guaranteed annual income amount might vary between 4% and 7%, he says.
Insurers are also skimping on their guaranteed minimum income benefit options, observes E.L. “Duke” Marston, a principal of Marston Financial & Insurance Services, Belfast, Me. Previously they might have offered a guaranteed annual lifetime payout of 6% or 7% if the client limited income payments to a fixed percentage annually, but today the guaranteed amount is typically 5% or less, he notes.
“In the current economic environment it doesn’t make sense for carriers to guarantee higher percentages than what they’re offering now,” says Marston. “But unless clients have slept through the downturn, they’ll understand why income benefits are less generous than they were in the past.”
When not cutting back or cutting out guaranteed living benefit payments, insurers are raising fees to fund them. O’Shea says that GLB fees have crept up an average of 15 to 20 basis points on the VA products he offers. Philip Harriman, the immediate past president of the Million Dollar Round Table and a principal of Lebel & Harriman, Falmouth, Me., has witnessed increases of 50 bps or more.
Advisors’ observations dovetail industry surveys. According to a report by Cerulli Associates, Boston, Mass., insurers are using a number of strategies to manage the risks associated with paying out what have become increasingly expensive guarantees on VAs.
These strategies include formal hedging programs, increased charges for benefits and reduced withdrawal rates on living benefits, Cerulli says in a recent report, noting that many insurers are paring back living benefits of 7% to around 6% or 5.5%. (Fees on such riders range between 20 and 100 bps, on top of a base insurance charge of between 140 to 160 bps.)
What impact are the fee increases and reduced GLB options having on advisors’ practices? Most of those interviewed by Annuity Sales Buzz say they have taken the changes in stride.
O’Shea observes that his VA sales are as “robust” as they were in prior years. That’s partly because he is enjoying an enlarged prospect base: Many of the newly unemployed are looking to park their qualified plan money in a safe vehicle where retirement savings can continue to grow tax-deferred without downside risk, he says. And, given a still uncertain economy and volatile equity markets, the added cost of the GLB riders is, for many clients, still worth the investment.
“If during the planning process a VA with a GMIB option is deemed to be suitable because the client is concerned about securing a guaranteed income for life, then the added cost of the guarantee is usually viewed as a reasonable trade-off,” says O’Shea. “That’s especially so when we’re looking at products of a highly rated and very reliable company.”
But given continuing financial difficulties among certain carriers in the wake of last year’s credit crisis, O’Shea says he is spending more time researching the financial strength of companies. He is also doing more due diligence on products using a software analysis tool that lets him make apples-to-apples comparisons in feature benefits among the different carriers. Result: He’s marketing fewer VA products.
Marston, too, is scrutinizing carriers and products more thoroughly.
“If a carrier is offering a product that seems too good to be true, I’ll want to know why,” he says. “If you’re not paying attention to what you’re selling, then you’re doing a disservice to your clients. And you’re probably shortening your career.”
Other advisors have been forced to downsize their VA portfolios because fewer insurers are offering GLBs. Adam Sachs, a chartered financial consultant and sales manager of Centinel Financial Group, a Wellesley Hills, Mass.-based member company of the John Hancock Financial Network, says he currently offers the guaranteed minimum withdrawal benefit option from only 3 or 4 insurers. Just six months ago, he was working with perhaps a dozen companies on GMWBs. He notes however, that the changes have applied chiefly to new offerings, as previously issued products continue to offer the benefits.
To compensate, Sachs says he plans to broaden his focus beyond VA products. “Going forward, I expect to be looking more at fixed annuities as an asset class,” he says.
“Immediate annuities in particular will play a more important role in retirement and income planning for my clients.”
Harriman, however, has not had to revamp his portfolio.
“Before the [recession] hit, we made sure we were dealing with manufacturers that have proven track records in the VA market space,” he says. “So we’re working with the same carriers now as before.”