The Department of the Treasury and the Internal Revenue Service released new guidance that is “designed to expand the use of income annuities in 401(k) plans.”
By Linda Koco
Guaranteed lifetime withdrawal benefit riders have been the dominant star of indexed annuity features, but they will soon share billing with several other product features, according to insurance and annuity executives.
That is one takeaway from a survey conducted earlier this month by The Phoenix Companies during a National Association for Fixed Annuities (NAFA) meeting in Aspen. The poll, disclosed here for the first time, sampled the views of 102 insurance and annuity executives on what features they considered “must haves” for the past year and which ones will be must haves in the coming year.
The results suggest that guaranteed lifetime withdrawal benefits (GLWBs) will still be at center stage over the next 12 months, but that other policy features will be taking bows, too. The results also point to some design issues that may lie ahead because more “must haves” are moving up.
Specifically, the survey found that 37 percent of executives are expecting that GLWBs will be a “must have” feature or rider for annuity sales in the next 12 months, said Mark Fitzgerald, national sales manager for Saybrus Partners, which is the distribution subsidiary for Phoenix. That percentage makes GLWBs the most in-demand feature for the coming year, according to the survey. However, nearly twice as many executives – 70 percent -- said GLWBs were the “must have” annuity feature/rider during the preceding 12 months, so there is some repositioning going on.
Does this wide gap between 12-month prediction and 12-month history mean that GLWBs are going the way of the buggy whip? Not necessarily.
For one thing, GLWBs came in first place in both 12-month ranking periods — the past 12 months and the next 12 months. So that feature continues to be the annuity industry’s shining star. But the surveyed executives predicted that other annuity features will start gaining traction in the coming year.
Those other features include a “choice of combination benefits,” a term referring to combo annuities that include long-term-care or chronic-care benefits. Twenty-five percent of the executives predicted these will be “must have” features in the next 12 months. By comparison, just 11 percent of the executives said that combo benefits were “must haves” during the preceding 12 months.
In addition, 11 percent predicted that “alternate index strategies or indices” (in indexed annuities) will be a “must have” for the next 12 months whereas only 3 percent said the same for the preceding 12 months.
Return-of-premium features (termed “principal preservation income riders” in the survey) are gaining ground too. Ten percent of the surveyed executives these will become a “must have” feature in the coming 12 months versus just 6 percent who said it was a “must have” in the preceding 12 months.
If the predictions for the next 12 months hold true, producers may soon see more annuities sporting more types of features/riders than in the past year or more annuities offering one or more of the “other” features.
Either way, the carriers will be expanding how their annuities meet consumer needs, said Fitzgerald, citing need for income, long-term care, and protections for a spouse and children as examples of those needs.
For instance, including alternate index strategies/indexes in an indexed annuity would provide a way to maximize accumulation opportunities as much as possible, he said. A return-of-premium feature would preserve principal. This could be good for customers who have only a small pension and/or some Social Security benefits.
Or a customer might want to leverage their money for long-term-care benefits and to create a death benefit for their family members, he said. Someone else might want a policy for guaranteed income plus coverage of care if needed.
Indexed annuities with multiple options could help, “depending on the scope of what is important to the client and the nature of the client’s situation.”
A lot of fixed annuity buyers are middle-market people, he pointed out. Their household net worth ranges from $250,000 to $1 million excluding their personal residence. Annuities that have more “dimensions” will help annuity professionals meet the needs this market is most likely to experience, Fitzgerald indicated. That is fueling the expansion of “must have” features for the coming year, he contended.
Expansion versus simplicity
That expansion would seem to conflict with another prediction uncovered by the survey. This has to do with annuity simplicity. Forty-four percent of the executives said they would like annuity manufacturers to focus the most on “less complex product designs” when developing new products and services in the next 12 months.
This product development wish-list had some other wanna-haves too, such as wanting carriers to develop better illustration tools (18 percent), to improve mobile application tools (18 percent), and to focus on multi-product platform solutions (13 percent). But desire for greater simplicity in design was clearly the front-runner.
That would be a neat trick for a carrier to do — to increase simplicity while also offering more types of benefits in their annuity products. It seems like a bit of a dichotomy, conceded Fitzgerald. It presents issues for carriers and consumers, too. For instance, “the more features you add to a product, the more strain on the insurance company” to support the product, he said. And if a consumer buys an annuity that has features to meet multiple needs, the contract might not provide the same level of benefits — say, for retirement income — as would a policy with fewer features (or just one).
Alternatively, if an advisor thinks it best that the customer use multiple products to meet the needs as opposed to one product meeting multiple needs, the customer may face multi-product complexity.
How, then, could carriers increase simplicity? Continue to educate producers and clients, so that both understand what is behind the product, Fitzgerald said. And as consumer needs expand, educate on solutions “as much as possible.”
This will be an opportunity for both producers and carriers to demonstrate their “true value,” he said.
Another simplifying measure would be for carriers and distributors to create better illustrations of how all the moving parts work in a multi-feature annuity, he said. Some carriers are doing this already, for example with annuities having GLWBs and more recently for combo policies.
New types of illustrations also will be needed, he said. These are illustrations that provide a portfolio view, not just a product view, for use with cases where the producer uses a multi-product approach to meeting client needs. This way, the simplification occurs at the illustration level.
In the survey, almost 62 percent of the executives said they believe that the need for guaranteed income in retirement is driving the “must have” features for today’s annuities. But another 23 percent said the driver is the “need to address multiple needs with one product.”
That may not be the annuity future anyone imagined a few years ago, but the survey suggests that’s in the forecast for the coming year.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at email@example.com.
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