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Ruark study: Annuitization rates are below 5 percent

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Annuitization rates are currently lower than 5 percent in the aggregate, new research shows.

Ruark Consulting LLC, Simsbury, Conn., has released this finding in a new report, “Guaranteed Minimum Income Benefit (GMIB) Annuitization Study. Based on data encompassing 600,000 contract years and 10,000 annuity contracts from seven insurance companies, the report also contains updates to two other Ruark reports: “Variable Annuity Surrender Study” and “Variable Annuity Partial Withdrawal Study.”

Annuitization rates, the GMIB report notes, vary by the age of the annuitant, peaking during the prime retirement ages of 65-69. As the value of the guarantee increases relative to the account value, the rate of annuitization also rises.

When the required waiting period prior to electing annuitization ends, the report adds, an election “spike” does occur, but at a more “muted level than formerly observed.

Full surrender rates have declined significantly since the advent of the recession that began in 2008, the report states. Policies with guaranteed lifetime withdrawal benefits (GSWBs) have the lowest surrender rates, followed by guaranteed minimum income benefits (GMIBs), guaranteed minimum withdrawal benefits (GMWBs) and policies containing no guaranteed living benefit.

The Ruark study also notes that annuity surrender rates decline significantly as the current value of guarantee benefits relative to account value increases. This “In-the-Moneyness” level is exhibited for all types of guaranteed living benefits.

Policies with only a guaranteed minimum death benefit, the report adds, also exhibit this effect, albeit to a lesser degree than found with GLBs. Surrender rates also vary “noticeably” by policy duration, distribution channel, commission structure and policy size, the report states.

Ruark Consulting’s prior partial withdrawal studies showed that partial withdrawal usage was low relative to industry expectations. The current study shows only a small increase in usage.

Results from the current study mirror also prior patterns of partial withdrawal usage, including:

Usage varies by age and tax-qualified status, particularly when required minimum distributions must be satisfied at age 70½ on tax-qualified policies.

GLWB partial withdrawal usage frequency increases by policy duration.

Insurance company risk on GLWBs is heightened when the amount of the partial withdrawal taken is the maximum allowed under the benefit.

Little relationship has been found between the “In-the-Moneyness” of the GLWB and the usage of the benefit. Owners appear to be preserving the future value of the guaranteed benefits for when they are needed in retirement, regardless of recent market performance, the report concludes.