For over two decades, according to LIMRA’s Secured Retirement Institute, variable annuity sales were highly correlated to the S&P 500. At the end of 1990, the S&P was just above 300, annual VA sales were $17 billion, and the trend for both was upwards.
However, that trend abruptly changed in 2012. The S&P 500 had risen over 1,200, and annual VA sales were $147 billion. Since then, the S&P 500 has achieved record highs, while variable annuity sales are on pace for a 20-year low.
How did that happen? More importantly, what must occur to change the trend?
1. The industry needs to unite to change the narrative.
Anyone that read my first annuity column on ThinkAdvisor was treated to a pop-up ad that read “I Hate Annuities, And You Should Too.” It is virtually impossible to search for annuity information on the internet without seeing that misinformed ad.
But the problem goes beyond that. Even positive articles on annuities are muted by comments about “high” commissions and fees. We, the insurance companies and the distributors, need to come together to tell the story about the millions of retirees who sleep well at night because of the annuity income they receive every month.
2. We need to get back to selling the benefits of tax deferral.
Long before we had living benefits, variable annuities were sold mostly for tax-deferred growth with a guarantee of principal at death. Well, guess what? Those benefits still apply.
Yes, I know that variable annuity policyholders give up the opportunity for long-term capital gains and stepped-up cost basis at death. But ask the mutual fund shareholders who are now receiving their 1099s for 2017 how receptive they would be to sheltering those taxes.
Keep in mind that anyone 65 and older will have their Medicare premiums determined by their level of adjusted income. Tax-deferred income does not count toward that calculation. It also doesn’t count toward the 3.8% investment surtax that helps pay for Obamacare.
3. Quit moving the goal line on existing policyholders.
Beginning in 2011, the variable annuity companies began to not only de-risk their current product offerings, but many also took steps to reduce their future liability on existing policies. This was accomplished by eliminating sub-account options, prohibiting additions to existing policies (or, if they didn’t have the right to do that, reducing commissions on the additions), forcing annuitization of the policy and offering to buy out existing policies.
I certainly understand why so many companies chose to do this. Their original pricing assumptions proved to be faulty, so they needed to protect their balance sheet. However, I think it’s important that we all acknowledge the cumulative impact these individual decisions have had on advisors’ perception of the variable annuity industry.
Many advisors believe that the insurance companies changed the rules of engagement after the fact. Each of these decisions creates the need to have an additional conversation with the policyholder — and not in a good way.
4. Help advisors manage their existing policies.