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February 21, 2013 at 10:02 AM
Until recently, pre-retirees desiring high investment yields and the assurance of a lifetime income invariably looked to variable annuities (VA) offering guaranteed living benefits. This no longer holds true.
Today, as I note in my feature, Reversal of fortunes, a growing numbers of aging baby boomers are favoring instead fixed indexed annuities — and for good reason. Though they don’t match the VA’s potential for market gains, FIAs outclass VAs in two key respects, both of which hinge of the products’ superior GLBs: (1) product flexibility; and (2) the ability to assure an income stream that can sustain clients throughout their retirement years.
Taking a look back
How have fixed indexed annuities managed to displace VAs in the estimation of insurance and financial professionals who market FIAs and the burgeoning number of insurers that manufacture the products? Part of the answer, as I learned over the course of my research on the topic, can be found in the VA providers’ response to the heightened market volatility stemming from economic crisis of 2008-2009, the impact of which the companies had not anticipated.
The market downturn led VA providers to revise their assumptions about annuitization rates. Eric Thomes, a senior vice president of sales at Allianz Life Insurance Company of North America, Minneapolis, observes that because VA account values were so hard hit by stock market declines, more policyholders than anticipated annuitized to secure the higher guaranteed income value.
Upshot: The VA providers were forced to revise their GLBs, notably by scaling back the riders’ benefits and/or boosting the cost of securing them. The recent market volatility, observers note, also contributed to the GLB revamp by forcing VA carriers to adopt more conservative hedging strategies on their own portfolios. The less they earn on their own investments, the less they can pass on to consumers in terms of feature benefits.
The GLBs offered through fixed indexed annuities, in contrast, required no such overall —t hanks to the products’ design.
Like traditional fixed annuities, the products guarantee the investor’s principal and assure a minimum interesting crediting rate, irrespective of market returns. Crucially, because equity market gains are defined by a contract formula, the manufacturers can be more flexible in formulating FIA living benefits than they can be with VAs.
“On the VA side, you don’t have as many options with income riders, as you typically have to annuitize to get the benefit,” says Hank Parrott, a principal of Estate & Financial Strategies, Inc., Brentwood, Tenn. “But with an FIA, clients stop the rider, allowing the account to accumulate in value and providing a higher income stream when the rider is restarted.”
