Will The 'For Life' Concept In Annuities Last?

By Linda Koco

October 15, 2006 at 08:00 PM

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The concept of offering annuities "for life" is getting a lot of buzz right now. But is the for life concept really for life? That is, is the use of annuities for lifetime income planning purposes here to stay?

There is certainly development activity in this area. For instance, in the last year, the "guaranteed minimum withdrawal benefit for life" (GMWB for life) feature has stirred "for life" interest in many quarters, starting with variable annuities last year and now moving into index annuities (IAs). Meanwhile, sales of lifetime immediate annuities are up at a few insurers (e.g., American National Insurance Company), and even lifetime annuitization is getting some play at a few carriers (though not industry-wide).

Furthermore, insurers are bringing out more software tools and programs that aim to help advisors set up client income plans for life that include use of annuities.

Advisors have told NU they're intrigued by the growing "for life" focus, and they are considering including it in their practice. But they have reservations.

"Will clients really be interested in buying and investing in solutions that run for their entire lives?" they ask. Or, is this a flash in the pan–something that will wane when the marketing stops and or when the stock market rebounds for a long period?

On a scale of 1 to 10, with 10 the highest, Richard W. Duff, an insurance agent in Denver, Colo., says the insurance industry averages 4-5 where "for life" development and commitment are concerned. The ranking is not higher, he says, because industry and government still need to make changes that will support and facilitate lifetime planning and use of annuities for lifetime income purposes.

"But we'll get to 10," he predicts, once the changes are made (see sidebar).

"As more people live longer, become frail and run out of money, the subject will become more fertile and necessary for people to confront," Duff explains. The immediate annuity will play a key role in this, he continues, because it provides income that can't be outlived.

Mark Schwarzmann, president, insurance, annuities and product distribution for Ameriprise Financial, Minneapolis, ranks the "for life" concept at 6-7 out of 10.

Producers who have been selling VAs are embracing the concept, he says. So are producers who are returning to the annuity world–expressly because VAs offer living benefits and now "for life" living benefits.

Even if the market goes up for a long time, "for life" products will still be attractive, Schwarzmann maintains, because "people do age, and they naturally shift from accumulation to distribution."

In fact, he says the annuity industry will need to work hard to keep up with the boomers who are making this transition.

Boomers are entering retirement without traditional defined benefit pensions and with less certainty about Social Security, he points out. Further, it is unlikely they will have forgotten the losses they suffered in the stock market in 2000-2002. "These people know the value of guarantees." They will not go back into a full accumulation mode, comparable to that in the 1990s, even in an up market, he predicts.

Another positive Schwarzmann sees is the recent enactment of the Pension Protection Act of 2006. "That opened the door to offering advice inside of pension plans," he says, adding, "This is great time for the annuity industry (in the 'for life' market), because we have solutions."

Schwarzmann believes the strongest products for this purpose are the living benefit annuity products, such as the VA GMWB for life. These designs are getting "better than ever," he says. For example, the RiverSource Annuities offered by his company pair the feature with mandatory asset allocation, auto rebalancing, and auto step-ups.

Also, GMWB for life products offer liquidity, he says, adding that this appeals to consumers and advisors who don't want to lose control. Congressmen and senators like it too, he says, noting that when they learn about it, "you see the light bulbs go off. They see this as a better match to the need…the big bad insurance company is not going to take all the money."

Traditional lifetime annuitization doesn't have such liquidity, he says. And while annuitization with commutation does have it, such products are harder for consumers to understand, and they have a "stigma about loss of control of the asset, whether true or not."

Richard Lane, director-individual annuities sales and marketing at Standard Insurance Company, Portland, Ore., puts the concept's development at 7 on a scale of 1 to 10.

"This is not flash in the pan," he says. The distributors and the companies are focusing much more on distribution products, because retirement today is not the same as it was in the past, he explains.

People in their 60s may still be working and may think of themselves as if they are in their 40s, Lane allows. So, some do have a hard time thinking about lifetime immediate annuities or locking up their money in lifetime income plans since they are "at such a young age."

But at some point, Lane continues, these people are going to want to access the money they've accumulated, and they will use annuities as one way to do that.

Annuity companies are gearing up for this now, Lane says. He points to the GMWBs for life as an example.

His own company is innovating in the lifetime area, too. In a few weeks, Standard will debut a commutation feature on lifetime fixed annuities.

Up to now, Standard, like other insurers, allowed commutation only on period-certain annuities, Lane notes. But now it is offering it with lifetime products, too, so those policyowners can access their money if they wish, Lane says. Unlike Schwarzmann, he does not view this design as unduly complicated. The owner withdraws money by commuting the annuity payout to the present value, and then the monthly payment drops to a new level, he says.

Ann Hughes, senior vice president and head of business development for ING annuity distribution, Dallas, Texas, rates the annuity industry as being an 8 on a scale of 1 to 10.

"We've come a long way in being able to explain (the longevity risk), remove complexity, and meet the need," she says.

Further, people do buy lifetime products, Hughes indicates. At ING, for instance, in 2006, 23% of the company's annuity sales are in VAs that have the GMWB for life feature. And 77% of ING's annuities are issued with either an income benefit (that the client can access after a waiting period) or the GMWB for life.

Her view is that the VA GMWB for life feature will become increasingly prevalent in the "for life" marketplace. "More advisors understand it (than other lifetime options), and they will gravitate to it and be more comfortable with presenting it."

What's more, annuity products are getting "better and better" in their ability to meet lifetime income needs, she says. And the marketplace is ready. For instance, "advisors are saying their clients fear they will outlive their money in retirement…No other retirement vehicles out there can assure this, because this is truly insurance."

The "for life" products will continue selling, whether the stock market goes up or down, she predicts, explaining that design favors this. For instance, ING's GMWB for life feature locks in a VA's highs during an up market on a quarterly basis, she says. As for market lows, clients know what their guaranteed minimum income will be.

There is a cost for GMWB for life, Hughes points out, and it's not for everyone. "It's for those who want to be sure some portion of their money is protected and insured."

Michael DeGeorge, vice president and general counsel at the National Association for Variable Annuities, Reston, Va., agrees that market conditions are fostering the staying power of the "for life" concept.

The first wave of baby boomers are turning 60 this year, he points out. "This is will be pushing professionals and consumers toward (considering) lifetime income."

The industry believes this concept is ripe now, he adds.

Hence, the "tremendous interest" in the original VA GMWB, the VA GMWB for life, and now, at a few companies, the VA joint life GMWB for life, he says.

Even annuitization has increased, DeGeorge says, citing anecdotes he has heard. Industry-wide, annuitization is still in the single-digits, he allows, but he believes interest in full and partial annuitization will continue to grow due to the aging of the population, the cutbacks and freezes in defined benefit plans, and the ongoing concern about changes to Social Security.

"With all the activity in pension reform, long term care, Medicare and Medicaid, I think the lifetime income concept has actually moved up a notch" in the past year, adds Deborah Tucker, vice president-communications at NAVA.

The just-enacted Pension Protection Act of 2006 reflects this too, says DeGeorge, by providing for hybrid annuity/LTC contracts.

The flexibility in the new VA GMWB for life features is a strong selling point, he adds. Policyowners can start and stop payments when they want and they can flex the amount they take out. At death, if the VA still has money in it, the proceeds are payable to the beneficiary. And, due to the exclusion ratio on the payouts, the feature has more favorable tax treatment than annuitization.

Still, executives note there are sticking points to furthering the "for life" concept.

For instance, among consumers, "there is not a lot of cry" for "for life" annuities right now, Lane says.

Also, "a lot of agents are still talking about (using annuities for) accumulation." The agents who do ask about payouts tend to focus on the payout rate, not the best payout with flexibility, he adds. And companies need to come up with better ways to allow access to funds in the "for life" products.

Hughes sees some hurdles with sales of single premium immediate annuities and lifetime annuitization. "Clients lose control of their assets" in those products, she explains. Adding a commutation feature would introduce liquidity, she allows, but, like Lane, she believes it would create a more complicated sale.

A variable SPIA for life would be the best option due to the growth it makes possible, Hughes adds. However, "it would be hard for producers to tell the client that 'I can't tell you how much (income) you'll get because it's variable.'"

"At its core, the annuity is an income product," stresses Francois Gadenne, president and CEO of Retirement Engineering Inc., Boston. "The problem is that the annuity has not been used that way in recent years. The winning hand has gone to using the annuity as an accumulation vehicle."

Given the changing picture of retirement, though, some industry leaders want to change that, he says. That's why they formed the Retirement Income Industry Association, a year-old Boston trade group.

RIIA, of which Gadenne is co-founder and chairman, aims to bring together all income players, from accumulation to distribution, to discuss developing retirement income opportunities and issues.

This could be seen as "a shock to the existing system in the industry," Gadenne allows. The existing system has been addressing retirement income by making "little tweaks" to business models, or "changing the story but not the product sets," he says. For instance, insurers have added "layers of riders and ever more complex features onto existing products," he says, while investment companies have added "new software and layers of investment advice while keeping their risky mutual funds as they are."

Those are incremental steps, Gadenne says. While some companies are in fact making sales with them, "incremental changes do not seem to be the final solution," he says.

There is an estimated $64 trillion in U.S. household wealth today, and $10 trillion-$30 trillion of it is financial wealth (not housing or private equity), he explains.

"This financial wealth needs to be longevitized. But VAs account for about $0.9 trillion of that, and fixed annuities for about $0.5 trillion. So, how will the insurance industry be able to absorb all the flow?" Asset/liability matching alone means the flow will exceed insurers' ability to put the business on the balance sheet, he says.

RIIA plans to address this by fostering exchange across all insurance and investment silos about new business models that can respond to the "for life" need. Some are even considering "newcos," or new companies, that would address the need, Gadenne says.

Unlike existing trade groups, which he explains tend to focus on specific product solutions or core missions, he says RIIA looks at the big picture across retirement income silos. (Its regular members include insurance and financial firms, and associate members include research, service, plan sponsor and financial planning firms.)

The annuity industry is in the lead where gearing up for lifetime planning is concerned, contends NAVA's Tucker.

But advisors and reps are "a little behind" the insurance companies, she says, and consumers are behind the reps.

For instance, "there is not yet a lot of dialogue among reps about whether a payout should be fixed or variable, or about the impact of inflation on income values. Nor are clients walking into advisors' offices to ask for a lifetime income stream as they ask for a mutual fund."

Still, a "small but growing shift" is occurring in consumer and advisor picture, Tucker says. "For instance, more reps are coming to see the value of lifetime income to the consumer."

In fact, thousands of reps have now taken NAVA's Managing Retirement Income Course over the past 2 years, reports DeGeorge. There are also some "enlightened professionals" who grasp the concept, he says. And more reps are moving away from product approaches and toward a retirement process approach, which targets lifetime planning.

In addition, as more consumers reach 60, they will increasingly look at the issues and talk to a trusted financial advisor about obtaining some form of lifetime income, Tucker says. With corporations freezing or terminating their defined benefit plans, she asks, "What will replace that (pension income) other than an annuity?"

The "handwriting is on the wall," says Standard's Lane. The bubble of focus on accumulation value in annuities will burst, he predicts, and market attention will be on distribution.

The leaders in this field realize that the solutions will no longer come just from inside the insurance industry, maintains RIIA's Gadenne. "It's now from all corners. The pot of gold is just too big for one industry to handle."

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