Clients who buy registered index-linked annuities may be a surprisingly simple group of people.
They seem to cling to their RILA contracts with a tight grip to avoid paying surrender charges during the surrender charge period.
Once the surrender charge period is over and the shock of shifting to new contract terms hits, RILA owners may be quick to give up their RILAs for something that pays a higher rate.
Analysts from Milliman, an actuarial consulting firm, found evidence supporting that assessment after they pulled precious drops of data about RILA owners from the life insurers for an "experience study," or a review of how product owners really behave.
What it means: Annuity advisors who believe the Milliman analysis could try to moderate RILAs' on/off tendencies or simply go with the RILA owners' yes-or-no flow.
The data: Variable and fixed indexed annuities have been around for decades. RILAs are only 15 years old.
When Milliman analysts look at variable annuities, they start with 104 million contract-years of exposure from 22 annuity issuers, for 2008 through 2023.
When the analysts study fixed indexed annuity owners, they begin with 21 million contract-years of exposure from 20 issuers, for 2007 through 2024.
The analysis of 2024 RILA data is the first RILA surrender study Milliman has been able to perform.
The analysts started with just 3.4 million contract-years of RILA exposure from seven issuers, for 2007 through 2024.
Milliman makes most of the study details, such as the numbers, available only to companies that have helped sponsor the study and to other parties that are willing to pay thousands of dollars for access.
The backdrop: Retirement savers who buy multi-year guaranteed annuities, or annuities that pay a fixed, guaranteed rate for more than one year, tend to lock onto the annuities during MYGA surrender charge periods.
Once the surrender charge period ends, MYGA owners tend to trade the annuities in for products that pay more.
Owners of variable and fixed indexed annuities have displayed more complicated behavior.
For variable and fixed indexed annuity owners, specific planning needs and product features, such as income guarantees, play a major role in determining whether the owners will keep their annuities or abandon them, according to Milliman.
RILA owners: In many ways, RILAs resemble fixed indexed annuities.
Life insurers back variable annuities with funds that resemble mutual funds and MYGA contracts mostly with portfolios of high-grade corporate bonds and other fixed income arrangements, such as mortgage loans.
Life insurers power RILAs and fixed index annuity crediting rates with investment index options.
The most obvious difference between a RILA contract and a fixed indexed annuity is that a RILA is registered with the U.S. Securities and Exchange Commission as a security and can expose the buyer to the risk of investment-related loss of principal.
"Companies have speculated whether the expected shock-lapse rate for RILA would align more closely with comparable VA or FIA products," according to a comment by Ben John, a Milliman actuarial data scientist, included in the RILA study publication announcement.
Instead, Johnson said, Milliman found that RILA owners acted more like MYGA owners.
Reasons: One reason for the difference could be distribution.
"RILA contracts are predominantly distributed through independent broker-dealers," according to Milliman's summary of the report. "Contracts sold through banks tend to experience higher surrender rates during the immediate period post-surrender charge."
Surrender rates for RILA contracts sold through independent broker-dealers tend to be higher than the surrender rates for RILA contracts sold through large, national brokerage firms.
RILA sellers might simply be quicker to move clients into higher-paying products when possible, or they may tend to work with clients who have financial needs or nest egg management instincts that are different from those of clients who own traditional variable annuities or fixed indexed annuities.
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