with sales on the increase and a boomer-oriented market more interested in generating and managing retirement assets, annuity issuers are crafting some inventive solutions. It's a good market for annuity sales. LIMRA reported that total U.S. sales of individual annuities were $63 billion during the first quarter of 2008, an increase of 9 percent from the first quarter of 2007. Results varied among the types of annuities: Fixed products were up 31 percent, variables up 1 percent, and indexed fell 2 percent.
Industry observers point to several possible causes for the sales increase, including stock market volatility and low rates on fixed-income investments. Another reason, however, is the ongoing improvement in annuities' features and benefits. Just a few years ago, the personal finance media usually considered annuities at best a lousy investment and more likely a rip-off. That attitude is changing, though, as baby boomers and reporters have noticed the contracts' protection and guaranteed income features. Insurers have responded by introducing new features at a rapid rate. "I've been in the business over 20 years and I can't recall a time when the cycle of product development and new product introductions has been so short," says Tom Mullen, senior vice president of marketing for variable annuities with John Hancock.
The issuers' perspective
Insurers have focused heavily on income- and withdrawal-benefits for much of the past year. Rob Grubka, vice president, Individual Annuities for Lincoln Financial Group, says the company continues to focus on retirement income and providing lifetime income to clients. Similarly, Mullen says Hancock has focused its product development efforts over the past 18 months on developing and refining their contracts' withdrawal benefit.
It's not just the number of pending boomer retirements that's driving the changes, though. It's also approaching retirement planning with a different attitude. Mullen has observed that investors' thinking changes as their focus shifts from accumulating assets to generating and managing income. For example, many pre-retirees hold assets with multiple advisors and financial services firms. That approach works during the accumulation phase, but it can reduce efficiency when it's time to start taking distributions.
"The mindset changes and there's a crisis of confidence," he says. "They don't know how much they're going to make in retirement. It causes them to rethink how they relate to advisors." One consequence of that adjustment, Mullen believes, is that clients seek out a deeper relationship with their primary advisor and begin to consolidate their assets. The goal of the consolidation is to provide a more accurate picture of lifetime income, and the process can lead them naturally to annuities.
Product developments
Product features continue to evolve. Grubka points to LFG's optional Guaranteed Lifetime Withdrawal Benefit (GLWB) rider, called Lincoln Lifetime Income Advantage, which is available with the American Legacy and Choice Plus variable annuity product suite. The features include guaranteed lifetime withdrawals, automatic annual 5 percent enhancements, automatic annual market step-up, and a step-up to 200 percent of the initial guaranteed amount at 10 years or age 70. LFG has also introduced an inflation-adjusted immediate annuity with the annual income benefit tied to the Consumer Price Index.
Mullen says that Hancock launched its Income Plus For Life product in 2007 with a unique set of benefits. In addition to the standard features expected from a withdrawal benefit, such as lifetime income beginning at age 60, and market participation through step-ups, the annuity includes a bonus. "It's an automatic bonus that applies in years when no withdrawals are taken," Mullen says. "It's basically a reward for those who are waiting to take income later to insure that the benefit base is increasing at a steady pace, regardless of market volatility, and the future income will be higher. If you took income at age 70 (after waiting 10 years), your income base would be at least double your investment. The design mimics the behavior of our prototypical customer who buys our annuity around the age of 60 and takes income around the age of 70. So if you can think of it like an IRA rollover, when the required minimum distributions start at age 70, that's what this product was geared for."
Hancock plans to introduce another contract feature in mid-June, Mullen says. The company will upgrade its step-up (market participation) program, increasing it from an annual frequency to a quarterly frequency.
MetLife recently enhanced its Lifetime Withdrawal Guarantee rider, according to Joe Jordan, senior vice president for individual business marketing at MetLife. The company's VA rider now has a 7.25 percent roll-up for this living benefit rider. This means the clients' benefit base, determined initially on the initial investment, would more than double in 10 years if they do not take withdrawals during that time.
