Guaranteed Lifetime Withdrawal Benefits

Consumers want 'em

A study by NFP Advisor Services Group found that nearly half of U.S. households in 2010 indicated an interest in products with guaranteed income for life. What's more, they said they would be willing to accept a lower rate of return for that benefit. It's not hard to understand why: Many boomers now face the prospect of retirement without a company-sponsored pension plan. So a product that offers a lifetime of regular income is attractive. 

But the advisory community may be lukewarm toward the riders. When NFP surveyed the advisory community, it found that independent RIAs recommended guaranteed income products just 49 percent of the time. Advisors affiliated with independent broker-dealers endorsed them 69 percent of the time. The highest recommendation rate was found among advisors allied with an insurance broker-dealer at 80 percent.

Many advisors may be turned off by guaranteed lifetime income riders because of the fee tacked onto the annuity, suggests Lloyd Lofton, chief operating officer of American Eagle Financial Services Inc., in Smyrna, Ga. For many retirees and pre-retirees, however, that extra expense is well worth it, especially with news reports blaring how Social Security could be insolvent during their lifetime. 

"I think 25 percent of prospects today are more likely to pay the extra 1 percent to have that income rider," Lofton says. "I think advisors sometime view guaranteed income as an expense and they think their clients can get a better return [elsewhere]. But sometimes it's not always about the return. Sometimes it's about the comfort and the security of knowing that part of your income is never going to change."

Nevertheless, whether a client should purchase these riders depends on a number of factors, such as age and the totality of their nest egg, Lofton says. "I would recommend it to the client whose personal situation and goals it's appropriate for. And that's probably not going to be every client."

Typically, a candidate for an annuity with a GLWB rider would be between 65 and 72, with enough income from other sources to cover most of their expected needs over the next 10 years, Lofton says. "I don't think they should be paying for a rider that after getting the annuity and paying their bills they have more month left than check," he adds.

More product makeovers

For both policyholders and their advisors, all these switch-ups in their annuity contracts can be confounding. What should an advisor advise a client to do when asked by an insurer to voluntarily make changes in the contract as AXA Equitable and Transamerica have done? 

Andrew Lord has two answers to that dilemma. On one hand, each case must be reviewed individually in the context of what the policyholder wants to accomplish. "A lot of that has to do with the performance of the policy, the timing of when they bought it, and the client's other assets," Lord says.

Yet, he is also outspoken in his belief that the policyholder may not be the ultimate beneficiary of the proposed modifications. "I believe at the end of the day it has very little to do with enhancing benefits for the client and a lot to do with a carrier trying to jettison a liability," Lord says.

He also predicts more product makeovers. "They'll tamper with the riders. They'll tamper with the pricing. They'll go back to existing clients and try to renegotiate the deal to the extent they can legally because they mispriced the product," Lord says. "At the end of the day it's an insurance benefit that wasn't designed very well actuarially."

Speaking from the carrier's viewpoint and not commenting on any specific company, Henderson says as long as the policyholder is given a voluntary choice, the practice is proper. 

"There's been a number of companies that have a lot of this risk on their books," he says. "So putting an offer like that out there is a fair thing to do. It's voluntary for customers and for some customers it won't make sense and for others, it might make sense. As long as it's a voluntary thing, giving choice to customers is always a good thing."

The question for advisors and their clients is whether they will continue to have the choice of a GLWB in a VA and in what form.

FIAs GET INTO THE ACTION

While variable annuity producers struggle to support their guaranteed lifetime withdrawal benefits, fixed indexed annuities (FIAs) are increasingly offering such riders. According to LIMRA, more than 80 percent of indexed annuities offered a GLWB as of the second quarter.

Back in 2009, the Phoenix Companies, Inc. switched from variable annuities to FIAs, and recently reached $1.5 billion in annuity funds under management.

The company, according to Phil Polkinghorn, senior executive vice president and president, business development, reports that more than 90 percent of FIAs sold by Phoenix contain a guaranteed income rider. Generally speaking, a fee of between 60 and 100 basis points is deducted from the account balance for that benefit, Polkinghorn says.

Yet like VA producers, FIA manufacturers must calculate how to pay for those benefits. For fixed indexed annuity underwriters, the challenge isn't so much market risk, but longevity, Polkinghorn explains. It's more likely a FIA policyholder will deplete their account while alive and therefore, have to depend on the insurer for lifetime income.

However, since the underlying crediting method in a FIA is more stable, funding those lifetime payouts is more predictable than in a VA, Polkinghorn says.

There is an insurance pooling mechanism at work as well. Policyholders who live beyond their account balances are pooled with those who die before their account balance extinguishes, Polkinghorn points out.