Advisors and their clients are increasingly relying on variable annuities as a tax-deferred accumulation vehicle, while insurance companies are pushing VA contracts with few or no optional benefits but a broader array of investment choices. Sound familiar?
These are two of the key factors shaping the variable annuity landscape entering 2015. And if they inspire a feeling of déjà vu, that’s because, when it comes to variable annuities today, ”What’s old is new again,” according to Ray Caucci, senior vice president, product management, underwriting, and advanced sales at Penn Mutual Life Insurance outside Philadelphia.
There’s much more to the variable annuity story than merely recycled headlines, however. Amid ever-shifting investor priorities and preferences come fresh new twists on the product side, and with them, a fresh batch of acronyms and buzzwords, including the IOVA (investment-only variable annuity), the VA+DIA (variable annuity with a deferred income annuity rider) and the structured product variable annuity, or spVA. Here’s a snapshot of what’s in and what’s out in a variable annuity market where sales remain steady, even as product innovation has slowed and other types of annuities garner most of the headlines.
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IN: Simple, stripped-down products and features. The new wave of IOVAs epitomizes an overall move to variable annuities “with not a lot of bells and whistles,” says John McCarthy, product manager, annuity solutions, at Chicago-based Morningstar, whoestimates that some 85 percent to 90 percent of IOVAs offered today come with no death or living benefits.
In most cases, these no-frills IOVAs are “sold strictly for tax-deferred accumulation,” explains Frank O’Connor, vice president of research and outreach at the Insured Retirement Institute, an industry group that promotes and tracks annuity products.
While inflows into IOVAs have been relatively modest to this point, McCarthy says he expects interest to grow as IOVA products proliferate from companies such as Jackson National, Jefferson National, Nationwide, MetLife, Principal and SunAmerica.
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OUT: Complex, shape-shifting features and benefits. Having choices is generally a good thing for consumers, but lately, the complexity involved with many living benefits and other variable annuity features, from multi-tiered pricing to a huge range of step-ups, withdrawal percentages and other moving parts, is enough to make one’s head spin. The new breed of IOVA makes life easier for advisors and their clients, relieving them of the task of trying to digest and understand “a prospectus that’s as thick as an 80-page novel,” says Caucci.
IN: Scaled-back living benefits. “Variable annuities with guaranteed income benefits still represent by far the lion’s share of [VA] sales,” says O’Connor. “It’s still very much a guaranteed income story.”
However, as much as the guaranteed living benefit (GLB) story may still resonate with VA buyers, the bulk of today’s optional income and withdrawal guarantees come with higher fees, tighter investment restrictions and greater complexity relative to the GLB riders of years past, factors that appear to be curbing GLB sales. According to the LIMRA Secure Retirement Institute, the election rate for VA GLB riders, when available, was 76 percent in the third quarter of 2014, down from a high of about 90 percent as recently as 2012.
OUT: Trumped-up living benefits. The living benefits arms race of years past is a distant memory. Indeed, with many insurers watering down or withdrawing GLBs to protect their bottom lines in the unrelenting low interest rate environment, advisors increasingly are looking to other vehicles like deferred income annuities, indexed annuities with GLBs and single-premium immediate annuities as income generators for clients in the distribution phase. While not an all-out exodus from income-producing GLBs, “living benefit activity is not at the level of 5 to 7 years ago,” Caucci observes.