The industry is launching new products, including immediate annuities.
Variable annuities sales climbed steadily in 2004,
netting the industry assets of more than $1 trillion as sales of one of
the industry's latest income creations-immediate variable
annuities-began to inch up, according to industry executives and
experts. Immediate variable annuities sales increased 4% in 2004, while
variable annuities sales overall climbed almost 13%, according to
statistics from the Life Insurance and Marketing Research Association
in Windsor, Conn., and the National Association of Variable Annuities
(NAVA) in Reston, Va.
Burgeoning investor interest in guaranteeing some part of their retirement income, especially in this era of diminishing pensions, is spurring more companies to develop a host of new variable products and features, says Mark Mackey, NAVA's CEO and president.
"Sales of variable products were strong in 2004. While immediate variable annuities haven't really taken off yet, we are seeing more interest and more products, especially ones with guaranteed payout floors and annual benefit stabilization features," says Mackay. "All of this helps people with planning and budgeting, and allows policyholders to know what their monthly benefits will be."
Many of the new products and riders were a response to the deleterious effect that plummeting stock market returns had on investors' variable annuities between 2000 and 2003, sometimes reducing monthly payouts by as much as 40%.
Now, for between 25 to 60 basis points, investors can guarantee the living benefits on their variable annuities, either by locking in their minimum monthly withdrawal benefits or their accumulation benefits, or both. A growing number of immediate annuities are also offering guaranteed payout annuity floors, which specify that while the contract's value can go up based on the subaccounts an investor or advisor chooses, contract amounts will not go down below a specified amount (usually 75% to 100% of the original contract value). Interestingly, many of these guarantees come with a requirement that investors use one of the company's asset allocation models when selecting investments.
While historically the decision to annuitize has been irrevocable, now more contracts allow policyholders to withdraw some or all of their investments. At the same time, since there is a distinct movement among brokers toward the sale of A-share variable contracts (which is tracking the move in mutual funds sales away from deferred loads), investors are grappling with fewer and fewer surrender charges.
This is good news for investors, who need help generating long-term retirement income, Mackey says. "I'm a huge proponent of the income market, and I think it's the future of the industry. This is an opportunity for companies to achieve a social good and find a market opportunity at the same time. Certainly, a lot of companies are taking a closer look at income annuities."
Sources say Mackey has privately told annuity marketers that if they don't start stressing payout annuities they could miss the opportunity of the next decade. All the companies we talked to have either rolled out new income VAs or riders recently or plan to this year.
"We launched three new variable income products that attach to our annuities," says Matt Sharpe, chief marketing officer of Retirement Income and Investments at Genworth Financial, the Richmond, Va.-based spin-off of GE Financial. Genworth is the leading U.S. vendor of single premium VAs, with sales up more than 21% compared with the industry's 16%. Sales of its variable income series, introduced in 2002, were up more than 70% last year. The company is projecting VA sales growth of between 80% to 120% this year.
The company's product development is in direct response to retirees' concerns about future income. Genworth's guaranteed income advantage rider allows clients to determine what income they want and when and lock that in. "The customers says, for instance that they want $2,000 a month at age 65 and we put a price on that and guarantee that's what they'll get," Sharpe says. "Of course, if the investor's returns exceed that goal, those returns come back to them."
The company also introduced a principal protection rider to help investors insure against what Sharpe calls "point-in-time risk," such as retiring in a year the stock market decides to nosedive. The rider allows investors to start taking payouts in the third year. "We guarantee a minimum amount based on their contract amount or an amount they choose, so even if the market works against them, they know their income stream will be locked in," Sharpe says.
This year, the company plans to roll out products that help investors guard against withdrawal, point-in-time and health-care cost risks. The offerings will include a next-generation immediate variable annuity. "We always have to tweak things to make them better from a consumer and producer perspective," says Sharpe, who declined to provide greater detail.
Of course, taming the variable nature of variable annuities while still permitting the upside potential of investing in the stock market isn't free. NAVA's Mackey says average variable annuity costs today range between 2.25% and 2.40%
Genworth's products, including mortality and management expenses and commissions, cost 2.05% to 2.07%. While the company currently does not offer a no-load product, it is considering the option and plans to introduce an institutional group VA product this year, Sharpe says.
American Express Financial Services is seeing distinct interest in its immediate products. "Sales of immediates are growing faster than deferred settlements (the industry's way of saying the annuitization of deferred products)," says Marketing Director Kim Mickelson. "People are starting to talk about the benefits of immediate annuities, and there is more media and airplay being given to products out there." Overall, the sale of variable products climbed 30% at the company last year, she says.
To help fuel continued interest, the firm introduced several new rider products for the income-minded in the past year. American Express's guaranteed minimum withdrawal benefit, while similar to those of other companies, has a twist: Instead of allowing investors to step-up and lock in gains they may have had in their initial contract investment once every five years, the company allows policyholders to lock in gains once a year on their anniversary date.
"The industry standard for this rider is every five years, but we decided to do it annually," Mickelson says. "It's a nice product for retirees who want the upside, because this allows them to participate in the market without the downside. Say they invest $100,000 in a contract to start. Then three years later on their anniversary date, the contract is worth $130,000. They're able to lock in that gain every year, while at the same time preventing market losses."
The company is introducing another new rider in May called the guaranteed minimum accumulation benefit, for those who are deferring withdrawals for at least ten years. It allows them to lock in gains and guarantee their income before they annuitize.
"These products are very powerful for clients planning retirement and those who are already in retirement because they provide guarantees and the efficiency of annuitization," Mickelson says.
The potential for income-producing or immediate VAs also captured the attention of Fidelity Investments, which used its insurance operations to create a national marketing and education campaign for advisors in 2004. "We've been working with advisors for about two, two-and-half years, but in the past year, we formally launched our services on a nationwide basis," says Doug Zarookian, senior vice president of Fidelity Life Insurance Company, in Stamford, Conn. "For the first time, we began to call on advisors and talk to them about our insurance agency and the solutions we can provide for their clients."
The efforts have paid off, yielding a 300% increase in annuities sales last year. Zarookian says advisors he has talked to around the country have begun to see the value of immediate annuities and would be enticed by what he categorizes as a "measured and sustained rise in the equity markets."
"Education of consumers and advisors will cause immediate variable income annuities to take off," Zarookian says. "These are some of the most complex products out there."
In addition to wanting stable stock market growth, advisors also want lower cost structures so they can add their fees on top, says Zarookian. Currently, Fidelity's variable annuities cost 80 basis points in mortality and fee expenses before subaccount costs are added in. To keep costs down, Fidelity plans to keep its products fairly simple, he adds, though it will introduce several offerings this year.
Current legislative efforts in the U.S. House of Representatives that would allow investors to exclude up to $20,000 of their annual retirement income from income tax, if they take their money in the form of a lifetime annuity payout, would also aid the sale of all annuities, Zarookian says.
That change would entice middle-income people to choose annuities, says TIAA-Cref Annuity Product Manager John Wesley. In the meantime, says Wesley, TIAA-Cref plans to continue to offer some of the lowest-cost variable annuities in the country, The company's all-in fees currently range from 0.66% to 0.86%. The company is seeing just 25% of new premiums roll into variable products, but Wesley says that will change as more people grow comfortable with how immediate and deferred variable annuities work.
To help, the company was one of the first in the country to structure it's immediate variable annuity so that investors could choose to have their income reset monthly or annually as the underlying worth of their investments changed. "It's less pronounced if you do it month by month," Wesley says.
The company is also allowing investors to shift their money from variable contracts into fixed and then back to variable if they so desire. "They get one round trip, which allows them to take advantage of any run ups in the stock market and at the same time park money they want to keep safe in a fixed annuity," Wesley says.
"This year, we've really seen a blend of both types of annuities, which is fitting," he adds. "I think people need to cover their basic needs, which they can do with fixed annuities, but they also need a piece in the variable side as an inflation hedge. I think we'll see this more and more in the coming years."