Annuities with Benefits

With pensions fading into the past and Social Security on shaky ground, carriers have devised new and imaginative riders on annuity contracts, all with the purpose of giving your clients a lifetime of income.

Wither the venerable pillars of retirement funds? The pension plans that represent one piece of the retirement income model are going the way of the $2 bill. Meanwhile, the Social Security program, another long-standing pillar, is wobbly at best. It’s no wonder, then, that the buzz in the annuity world among investors, advisors and insurance carriers alike is about optional features that guarantee a lifetime income stream–living benefit riders.

“The emphasis is clearly on personal savings to create that guaranteed [retirement] paycheck,” says Mark Caner, president of W&S Financial Group Distributors in Cincinnati. “The [annuity] world really revolves around living benefits,” echoes John McCarthy, product manager, annuity solutions, at Morningstar, Inc. in Chicago, noting that living benefit riders–chiefly lifetime guarantee minimum withdrawal benefits (GMWBs)–now are purchased with some 85 percent of variable annuity contracts. “That’s where all the effort and focus is going on the part of carriers.”

Not surprisingly, much of the action with annuity contract riders focuses on GMWBs and other kinds of living benefits. But instead of inventing entirely new types of riders, carriers are innovating in more subtle ways, with new contract twists and wrinkles, many of them related to income and death benefit guarantees.

Here’s a look at some of the most intriguing developmentson the annuity rider front:

The emergence of hybrid death benefit/living benefit guarantees. Last year, for example, the Phoenix Cos. introduced a rider called the Enhanced Guaranteed Income and Family Wealth Transfer Benefit (Enhanced G.I.F.T. Benefit) that combines guaranteed lifetime withdrawals with an enhanced death benefit for one charge.

Available on several of the company’s fixed index annuities, the G.I.F.T. benefit has been “received very well” by investors, says Dana Pedersen, vice president for annuity product development at Hartford, Conn.-based Phoenix, mainly because it provides a strong death benefit guarantee for wealth transfer, then a guaranteed income stream for life.

“When the client is purchasing a product like this, they don’t know exactly what their planning needs are going to be. [The G.I.F.T. rider] eliminates having to make an upfront decision between the death benefit [guarantee] and [an] income protection [guarantee],” she explains.

More robust GMWB step-up provisions. “Step-up numbers are creeping up to 6 percent, 7 percent, even 8 percent now, where before 5 percent had been the norm,” McCarthy says. For example, a lifetime GMWB unveiled recently by Ohio National offers an 8 percent simple-interest step-up, while Jackson National’s Lifeguard Freedom Flex GMWB allows investors to choose a step-up amount between 5 percent and 8 percent for 10 years, with the fee adjusted accordingly.

Then there’s the Income Maximizer Plus rider available on Sun Life’s Financial Masters variable annuities. What makes the rider unique among GMWBs, says McCarthy, is its so-called “Plus
Factor,” an inflation hedge feature that increases the contract-holder’s withdrawal benefit base (and lifetime income) by 2.5 percent (compounding interest) every year after the person begins taking lifetime income.

More long-term care options. Despite getting more favorable tax treatment starting last year, the pickings still are slim when it comes to annuity riders that allow access to contract funds to cover the cost of long-term care. But both McCarthy and Caner say more players could soon enter that space. “I would suspect that my company, along with many others, have already developed benefits like these, they just haven’t launched them,” Caner says.