Many workers who buy voluntary life insurance value it enough to continue paying for it. That perceived value should make a solid foundation upon which to build.
By Linda Koco
The term “suspension” is generating quite a stir in variable annuity circles. Advisors are upset because a couple of big variable annuity carriers—Prudential and Jackson National—are suspending sales of, or deposits into, certain variable annuities, such as those offering guaranteed living benefits.
Other variable annuity carriers are expected to follow, and many have already cut back on features in products they continue to sell.
In general, carriers describe their moves as efforts to protect the interests of existing customers and to ensure that the companies will be able to continue in business—and to meet obligations to customers—for the long-term.
The strain on capital created by today’s prolonged low interest rate environment is the trigger. That strain has made it difficult for insurers to support certain policy guarantees, especially the very popular living benefit guarantees such as the guaranteed lifetime withdrawal benefit and guaranteed minimum income benefit options. Certain of those guarantees were designed for sale in times when interest rates were higher.
Advisors say they understand the economic pressures, but they are not happy with the suspension announcements.
One reason is that advisors who have been selling the suspended products, and clients who have been making purchase payments into suspended variable annuities they already own, must now stop. That can derail, or at least unsettle, existing financial plans.
Aggravating matters is that the suspension notices arrived just a few days before the effective date. That left little time for advisors to complete sales then in process or to advise clients, before the fact, about strategies and alternatives. “Carriers no doubt wanted to avoid a fire-sale market which would further raise profitability concerns,” observes Tom Hegna, president of tomhegna.com, Fountain Hills, Ariz.
Then, there is that word, “suspended.” Advisors say they are not really sure what an annuity suspension means, when it will end, or what impact it will have on their ability to meet client needs going forward.
“The term implies that the products could go live again, but I’m thinking we’ll never see those products again,” laments one registered rep who had had been putting a lot of business through one of the companies with suspensions now in effect. He spoke about his feelings on condition of anonymity. “The word does not represent the issue reasonably,” he contends.
Another rep, who also asked not to be named, says she is not sure about the meaning of suspension. “I took it that the companies will no longer be writing the products. After all, carriers routinely stop writing older versions of products when they bring out a new version. Then again, this could be a temporary measure. I just don’t know.”
The advisor says she plans to check it out with the internal wholesaler before talking to clients about the suspension. “I wouldn’t want to do anything under speculation,” she explains.
No track record
It would help if there were a track record for “suspensions” in the variable annuity world. However, there isn’t one.
“I can’t think of any example from the past where a company has suspended a variable annuity or feature,” says Joan Boros, a Washington attorney who has long worked with variable annuity products. She is of counsel with the Washington law firm of Jorden Burt LLP.
That means that advisors today do not have a history to look back upon for guidance about what will happen next.
Boros thinks it is the rapid growth in sales of variable annuities with living benefit guarantees, combined with the extremely low and prolonged interest rate environment, that spurred carriers to start certain suspensions.
Time was, when a company wanted to stop selling a variable annuity, it could ‘Great-West’ the product, she recalls, meaning if the carrier sold no more than 5,000 contracts total (among other conditions), it would not have to update the product registration statement. The carrier could go on accepting purchase payments into existing contracts, but it could just stop new sales from then on.
Today, Boros continues, far fewer products are ‘Great-Wested’ than in the past. Variable annuities with living benefits have become so popular that sales often “exceed the 5,000 mark virtually overnight,” she says.
Ironically, the low interest rate environment that is putting pressure on carriers is the same factor that contributed to the popularity of the policies in the first place. Customers compared what they were getting from fixed interest products to the income they could get from a variable annuity living benefit, and liked the annuity’s advantage, Boros says.
The aging population is a contributing factor, too. People in their mid-40s and up are increasingly worried about outliving their assets. When they see variable annuities, Boros says, “it’s like, wow, there is a thing called an annuity, and a guaranteed income benefit, and guaranteed withdrawals. I want that.”
Putting products in mothballs
She describes the suspensions as a step that carriers are taking to keep a product’s doors open, if market conditions change. It’s like “putting the products in mothballs, until the weather changes.”
“To my knowledge, the suspensions are being done in a manner so that the carriers can reopen the doors when times change. They are preserving what’s needed to resume sales--for instance, collecting data, making system enhancements, etc.,” Boros explains.
In view of limited capacity from reinsurers and the volatility of the markets that make hedging very costly, “it would be reprehensible if the companies kept on selling without making changes,” Boros adds.
One factor that could have influenced the carriers decision to suspend, rather than exit, certain products is “the possibility that interest rates might rise quickly later on, making those products suddenly viable once again,” says Robert Hanten, president of Solidarity Financial, Plymouth, Minn., and also president of NAIFA-Minneapolis.
That could happen, if some development occurs that causes investor perceptions to change quickly, he says. Examples he cites include the U.S. falling off the fiscal cliff, economic stress in Europe, or upturns in the price of oil. “If people sense inflation will rise, they will start borrowing money from the banks so they can buy hard assets,” Hanten says. “That would set off a sudden rise in inflation.”
If something like that happens, interest rates could move in a hurry from, say, 1 percent to perhaps 7 percent or 8 percent, Hanten continues. That would enable carriers to get a better spread from their bond portfolios, and that could spur them to bring certain products out of suspension, he says.
For now, advisors are faced with deciding what to do. For example, one advisor has been writing a variable annuity for couples and including a joint life living benefit rider that is now suspended. “Now, I might have to guess who to write the product on, the husband or the wife.”
Not all doom-and-gloom
Hegna of Fountain Hills, Ariz., says “it won’t be all doom-and-gloom.”
Most advisors will find new products, he predicts. In fact, says that, as more carriers announce suspensions of living benefit features, “sales of deferred income annuities will soar.”
Deferred income annuities are deferred fixed annuities that people buy today with the expectation that the payout will start several years later, typically at retirement or beyond. There are now eight carriers in the deferred income annuity market and more are on the way, according to Beacon Research an Evanston, Ill., annuity researcher.
Hegna thinks advisors will start selling more of these products in lieu of variable annuities with living benefit guarantees, “because the guaranteed income that people can get from variable annuities can’t compete with what they can get from a deferred income annuity.”
The guaranteed payout on the deferred income annuities could be 8 percent (for instance, 8 percent of a $100,000 single premium) once the income period starts, he says. The income payout rate increases with the length of the deferral period.
Another consideration for advisors and clients is that the deferred income policies are less risky for insurance companies to sell than variable annuities. “That’s because there is no market risk, and the companies can price the contracts very conservatively. They buy the bonds and price accordingly,”Hegna says.
The point is, advisors do have options, he reiterates.
Boros agrees. Noting that options include other variable annuities which remain on the market. “Maybe the other products won’t have the same features as before or the same compensation, but the point is the carriers that have suspended some products aren’t closing their doors; they have other products to sell.”
It’s hard times right now, she adds. “Everybody is suffering.”
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at email@example.com.
© Entire contents copyright 2012 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com