(Bloomberg News) U.S. insurers' sales of variable annuities jumped 24 percent in the first quarter, led by policies that promise lifetime income and protect against market declines, at a time when investors are still wary of stocks.
The retirement products' growth is driven in part by concerns that another stock market drop like the one in 2008 could wipe out savings, said Moshe Milevsky, finance professor at the Schulich School of Business at York University in Toronto. Consumers "fear that the S&P at 1,300 is a mirage and it's going to go back to 700 for the rest of our lives," he said.
Annuities are insurance contracts that offer a steady stream of income. With variable annuities, customers can choose their investments such as stock and bond funds and the account value will fluctuate with the market. For MetLife Inc. and Prudential Financial Inc., the top two U.S. life insurers, the hottest product this year also offers a guarantee of income for life, even if a customer's account balance falls because of market declines. There's an annual fee for the rider, which averages about 1.03 percent, according to Morningstar Inc., on top of the regular annuity fees, which average about 2.51 percent.
The high fees mean that "the upside potential" in these contracts is "fairly limited," said Kenneth Masters, director of life insurance design and development for Pinnacle Financial Group in Southborough, Massachusetts. "Would I have been better off saving 370 basis points and being fully in the stock market?"
Difficult To Understand
About 96 percent of Prudential's record $6.8 billion in sales of variable annuities in the first quarter were policies that included a lifetime income guarantee. At MetLife, 80 percent of their $5.7 billion of products sold in the quarter carried a guaranteed benefit.
It's difficult for consumers to understand the conditions and limitations that come with the benefits of these guarantees, such as when an insurer can increase fees or restrict investments, said Milevsky.
Insurers may offer a rate of return such as 5 percent or 6 percent a year with these riders, which customers also may misunderstand, said Timothy Pfeifer, a consulting actuary and president of Pfeifer Advisory LLC in Libertyville, Illinois. "Customers might be told that their policy will provide a 6 percent annual guarantee and think that sounds great. That is not a lump sum you can take out." The income promised for life can deplete if owners take out too much money or too fast, said Pfeifer.
Terms Vary
Sales of variable annuities in the U.S. climbed to $39.8 billion in the first quarter, from $32.2 billion a year earlier, according to trade group Limra. Investors have withdrawn $50 billion from U.S. stock mutual funds in the 12 months through April, according to Chicago-based Morningstar, a research firm.
Terms of the riders attached to variable annuity contracts vary by insurer. Here's how one from Prudential, the top seller of variable annuities, works: A customer puts $100,000 into a variable annuity and picks investments such as stock and bond funds offered in the contract. The Newark, New Jersey-based insurer promises that it will record the highest daily value the account ever reaches and that amount will increase at 5 percent annual compounded growth, until an owner starts taking out money.