By Linda Koco
InsuranceNewsNet Magazine, December 2011
Recent annuity product rollouts are putting the spotlight on retirement income strategies as opposed to the how-much-you-can-accumulate focus of yesteryear—and advisors are of two minds about that.
Because so many of the new annuity debuts mention retirement income, annuity historians may one day call this the all-about-income era.
For accumulation-focused specialists, the trend may bring more attention to retirement income than they would like to see.
According to Kevin Loffredi, vice president-insurance solutions for Morningstar, some registered reps just don’t believe in using annuities to help clients build an income stream. “They say they can build an investment portfolio and systematic withdrawal plan that is better suited to the client’s needs, and that this is all that their clients need.”
But other advisors Loffredi has trained welcome the growing focus on income products, he says, and they like the emergence of income planning tools and training they are seeing, too.
“They say this is great because they now have tools that are positioned in a way that will help them help clients who are starting to retire,” he says. Some advisors like the products even if the policies don’t pay compensation on the assets put inside the products, he adds.
The income focus has been building up for several years. But a review of new annuities that have been coming out in recent months shows that the trend is now more than a matter of focus. Retirement income talk seems to be everywhere—from variable and fixed annuities on to indexed annuities or longevity ones. Defined contribution plan providers are stepping forward, too. It’s a virtual tidal wave. Take a look.
As this article was heading for print, Sun Life Financial announced it was launching Sun Life Solutions, a variable annuity (VA) with a living benefit option that, as the company puts it, “allows investors to lock in a benefit base used to calculate income.”
The product is a VA, so it does offer the associated subaccounts for the accumulation period. But the carrier announcement hones in on the income aspects, quoting an executive saying that a VA with a living benefit “can help investors who max out on their qualified retirement plans to not only secure guaranteed retirement income, but also lock in potential market gains.”
Another carrier, AXA Equitable Life, added some oomph to the guaranteed income benefit rider in its Retirement Cornerstone VA, a product offering an investment account and a retirement income account.
What the carrier did was to put a two-year “rate hold” on the deferral bonus roll-up and annual withdrawal rates on benefit bases of the VA’s guaranteed income benefit rider. The rate hold should give policyholders a “growth strategy” for riding out today’s low interest rates, according to Nick Lane, president -retirement savings, in a statement announcing the enhancement. And the retirement income hook? That it should help protect retirement income, says Steve Mabry, senior vice president-individual annuity product development.
Another example of income-focused VAs: Securian Financial Group debuted Ovation Lifetime Income, a lifetime income rider option for its MultiOption VA, which is underwritten by Minnesota Life. The rider guarantees income for life with withdrawals that can continue regardless of fund performance or contract value, and the carrier locks in any increases in the benefit base and the guaranteed annual income each year. The rider not only will provide a steady stream of retirement income, says Dan Kruse, second vice president, in a rollout statement. It also “offers opportunities to boost that income during retirement.”
Even big mutual fund players are pushing the income envelope. In October, for instance, Vanguard added a guaranteed lifetime withdrawal benefit rider to its Vanguard Variable Annuity. Issued by Monumental Life for an additional fee, the rider guarantees that a fixed percentage of the VA’s total withdrawal base can be withdrawn annually for the life of the annuitant (and spouse, if desired).
Yes, the purpose is “to provide a steady income stream,” the company says. (Other big-name mutual fund players have taken similar steps.)
Many VA carriers already offer guaranteed minimum withdrawal benefit riders, but Vanguard’s move is notable, not only because of the company’s mutual fund heft, but also because it has already staked out turf in the retirement income arena (via managed payout funds aimed at retiree needs, target date funds, etc.). The new rider signals that the company is moving deeper into the income field.
Two other carriers have brought out what they call “pension-like” approaches to the retirement income table in recent months; one product is designed for the defined contribution market while the other is designed for the individual market.
The Hartford Financial Services Group has the defined contribution product. Called Hartford Lifetime Income, it is a fixed deferred annuity, supported by patents, for use as an embedded investment option inside of 401(k) retirement plans. This “in-plan” income option allows 401(k) plan participants to purchase income “shares” that provide $10 of guaranteed monthly income for life. So, if a participant has 50 income shares, that would generate $500 a month, the carrier says.
New York Life and Annuity has the individual product, called Guaranteed Future Income Annuity. It is a longevity insurance policy on a flexible-premium annuity chassis. Longevity insurance products defer the start of the income payout period for several years—typically until age 85 or after 10 or more policy years. The contract requires an initial premium payment of at least $10,000 and allows additional payments up to the income start date. Owners can defer or accelerate the income start date (not with the life-only option), include another annuitant in the payment stream and select inflation protection and legacy options (including a cash refund).
The Hartford and New York Life products are both being positioned as vehicles that will help create a pension-like income during the retirement years even though they target different markets, use different policy structures and come from different carriers. That is a sure sign that carriers are zeroing in on a trend that many researchers have been reporting on—namely, that retirement-minded consumers are looking for ways to create income streams in retirement that are comparable to the monthly income provided by the fast-fading traditional pension plans.
Accumulation Still There
Not all new annuity launches are income-heavy, which is to say that some do have an accumulation tilt to them. Still, even when carriers talk accumulation, the tendency today is also to talk income.
Take, for example, the Allianz 360 product from Allianz Life Insurance of North America. Marketed exclusively through the carrier’s new preferred distribution program, the product is a fixed indexed annuity. It has the upside potential and downside guarantees normally associated with the accumulation period of indexed annuities. But it also offers options for increasing the income benefits during both the accumulation and income phases of the product.
Even rollouts of traditional deferred fixed annuities mention that guaranteed lifetime income options are available. The lifetime option has always been available in these products, of course, but now the carriers are pointing it out.
Frank O’Connor, product manager of the variable annuity database at Morningstar, has been watching the growth in income products for some time. “The financial crisis notwithstanding, the benefit retooling that followed did not seem to diminish the availability of the lifetime income guarantees in VAs,” he says. “There was no slowdown in product development either.”
That, he says, is a function of what the carriers are seeing. “They see the income need in consumers, and that is driving the addition of living benefit features to the products, and therefore driving the product sales.” In fact, he says, “When a living benefit is available, our research shows that the benefit is taken 87 percent of the time.”
Reps that ignore income products may be doing this because they don’t understand the features, suggests Morningstar’s Loffredi.
“The new products can be confusing,” he allows, “because a different sales process is often involved, with less focus on the investment and more on the emotional component—the living benefit (of retirement income) with the sleep-at-night factor (the guarantee).”
Not every rep believes in sleep-at-night, Loffredi adds, so the insurance companies should probably take some time “to educate advisors on the value proposition of their income products.
Retirement Income Concern Grows
Companies and researchers are continuously releasing reports pointing to growing nationwide concern about retirement security. Here are a few examples from October alone:
The Insured Retirement Institute reported that 51 percent of older baby boomers, between ages 60 and 65 in 2011, believe they will not have enough money to live comfortably through retirement.
ING Direct reported that although 89 percent of Americans it surveyed believe that saving for retirement should start with a person’s first job and continue throughout the working years, only 28 percent said nothing has gotten in the way of their saving for retirement.
Sun Life Financial reported that American workers’ trust in their future retirement has reached a four-year low—and in September, retirement confidence dropped nearly 20 percent from the same period a year earlier.
LIMRA reported that 41 percent of pre-retirees are not putting aside any money for retirement at all, and 21 percent of pre-retirees are saving less than $100 a month.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].
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