Almost every study produced shows more and more consumers are interested in guaranteed lifetime income benefits. It has caused many advisors who were previously opposed to them to get educated and catch up to those of us who were ahead of the curve in providing the very best for our clients.
However, many variable annuity (VA) providers are changing their plans. These changes are taking place in existing and new product offerings. These lifetime income benefits as well as guaranteed death benefits are becoming very expensive for insurers due in part to the extended low-interest-rate environment.
Insurers are actually asking policy owners to give up those benefits of their own free will. Some are even giving owners cash incentives in their current annuity. Some insurers further plan to minimize the distribution network and VA offerings.
Others are no longer going to offer variable annuities at all or are giving their sales force minimal notice, sometimes just days, that plans are changing or no longer being offered.
There are two risks that VAs present: the longevity of policy owners and exposure to the market.
Variable annuities are still selling at a record pace as insurers get creative with their scaling back of the benefits. The fees for living income and guaranteed death benefit riders range from 0.75 percent to 1.25 percent. Insurers are limiting benefits at the same cost so as not to produce sticker shock. Some analysts have compared it to what food manufacturers do when costs of production go up. We go and buy a bag of chips for 99 cents and come back a few weeks later and find a smaller bag is in its place for the same price.
Further, some insurers are launching variable annuities without these benefits and increasing their sub-account offerings. This is important since many insurers limit the type of allocations an owner can participate in if they have a living or death benefit. This limiting of sub-accounts (most often mutual funds) helps protect the insurer from large decreases in the cash value.
Consumer interest growing