Ask Andrew Lord, founder and president of Essential Planning, LLC, in Portsmouth, N.H., if more of his clients are purchasing annuities with lifetime income riders now and he answers plainly, “I don’t see anybody buying them without them.”
In fact, a few years ago, when he saw the growing demand for guaranteed lifetime withdrawal benefits (GLWBs), Lord renewed his securities license so he could sell variable annuities (VAs) with those add-ons. “Took all the tests again like when I was a kid because I thought it was such an important benefit for my clientele,” he says.
However, the landscape is rapidly changing in regards to GLWBs attached to variable annuities. Still widely popular with consumers, insurers are finding these once powerful selling points are coming back to haunt them as interest rates remain stubbornly low, making it difficult to underwrite payouts that could go on far into the future.
In response, some carriers have proposed their policyholders consider voluntary changes to VA contracts. Two noteworthy examples:
- In May, Transamerica offered current holders of several of its VAs with guaranteed lifetime income benefits the option to drop those riders in exchange for an enhanced full cash surrender value.
- A month later, AXA Equitable gave owners of its Accumulator® variable annuity the choice to trade the guaranteed minimum death benefit for a higher account value. A spokesperson for the company said in an email: “This is an optional, limited time offer on Accumulator contracts issued between 2002 and 2007, intended to benefit the client and the company. Clients can terminate and stop paying for guaranteed death benefit riders they may no longer need, and the company benefits because these riders are expensive in today’s market.”
Others carriers, meanwhile, are taking a more unilateral approach. Prudential recently informed owners of several of its annuities that they can no longer make additional purchase payments. The suspension went into effect September 14.
“The decision…was made as a direct result of the persistent low interest rate environment that has impacted our industry. Our goal remains to continue to proactively and prudently manage the assets investors entrust to us,” said Prudential spokesperson Lisa Bennett via email. She declined to comment on the duration of the suspension.
In other instances, insurers are trimming withdrawal percentages and raising fees. In its second-quarter analysis of the VA market, Morningstar charted 168 product changes, up from 59 in the first quarter but nearly on par with the 162 a year earlier. In the report, John McCarthy, product manager, annuity solutions at Morningstar, wrote that “carriers are dealing with the reality that living benefits are costly to maintain.”
An expensive hedge
Due to historically low interest rates, Eric Henderson, senior vice president, individual products and solutions for Nationwide in Columbus, Ohio, concedes hedging guaranteed income riders has become more expensive for insurers. In the VA space, an insurer’s primary risk is on the equity market side more than so longevity.
Accordingly, carriers are trimming benefits while trying to keep a lid on price hikes. “You end up pulling back on the amount of benefit you can provide for the same price,” Henderson says.
Bruce Ferris, head of sales and distribution for Prudential Annuities, in Shelton, Conn., says that about 90 percent of the variable annuities it sells are bought with the living benefit rider. Such a benefit typically costs between 95 and 150 basis points of the account balance industry-wide, he notes.
Yet Ferris concedes that annuity producers, like Prudential, are not immune from current capital market conditions. Therefore, carriers are fine-tuning their benefit platforms. For example, Ferris says that prior to 2008, roll-ups were generally in the 6 percent to 8 percent range; today, roll-ups bounce between 4 percent and 5 percent.
“For the sustainability of these solutions over the long-term, I think it’s prudent of our industry” to make those adjustments, Ferris says.
VAs without GLWBs
Others entering the VA marketnot all are leavinghave opted to offer a product without an optional living income rider.
When it launched its LiveWell Variable Annuitysm back in March, Sammons Retirement Solutions, a broker-dealer affiliated with Sammons Financial Group, designed it without the option to buy a guaranteed lifetime income rider, or any other rider for that matter.
Instead, its main focus in designing the VA was to keep the structure simple and costs down, while touting its tax-deferral features, says Bill Lowe, president of Sammons Retirement Solutions in West Des Moines, Iowa. The VA is built around a more robust fund menu that includes tactical and emerging market funds, something it could it not do if the product offered a living benefit rider, Lowe says. And another thing: Sammons’ VA has no surrender charge.
Lowe says offering lifetime income guarantees in the current low-interest rate environment is simply not affordable for an annuity provider. “Which is why you’ve seen a lot of companies pulling out of the market, pulling products and redoing products,” Lowe says. “Because they just weren’t priced to be sustainable at these levels.” Yet he adds that Sammons Retirement Solutions may enter the living benefit marketplace when “the environment is more conducive to that.”