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By Linda Koco
“One-size-fits-all is no longer sustainable in terms of financial education and benefits communication,” according to Liz Davidson, chief executive officer of Financial Finesse of El Segundo, Calif.
That is one of the main findings of a study that Davidson’s firm recently published on financial and other characteristics of millennials, Gen Xers and baby boomers.
It is a point that Nationwide shares, but in terms of product offerings for consumers. Case in point: Last week, Nationwide unveiled a new suite of three living benefits riders for its Destination Series 2.0 of variable annuities. Living benefit riders create a retirement income stream. Each rider in the suite targets a different demographic.
Why three riders?
Three riders? That’s right, Eric Henderson, senior vice president-life insurance and annuities, said in an interview with InsuranceNewsNet.
Every client has different needs and desires, he said, so a one-size-fits-all approach to living benefits won’t work. The different riders will enable advisors to recommend what fits best based on client age, risk tolerance and potential guaranteed income needs.
The original living benefits rider, called L.inc, offers income guarantees and features that appeal to baby boomers in the 55-65 age range who are looking for certainty, Henderson said. The design lets the customer know the minimum level of income the person will have at retirement.
Meanwhile, the new Lifetime Income Capture rider targets late baby boomers in the 50-55 age range, while the Lifetime Income Track rider targets early Gen Xers and boomers in the 45-55 age range. Both riders guarantee lifetime income but determine growth potential in different ways, such as in the amount of equity exposure permitted, he said.
Offering various products for different markets is not new in the life and annuity industry. Carriers routinely design one annuity or life policy for sale in banks, and other versions for sale through broker/dealers, independent agents, direct channels and other distribution channels. In addition, agents and advisors are quite accustomed to positioning certain products for younger versus older customers, based on needs, circumstances, etc.
But in the world of variable annuity living benefit riders, one carrier offering a suite of riders for one product series is the exception, not the rule.
This is especially the case in recent times, when a number of carriers have swapped out older, richer living benefit designs for a new, scaled down versions. They did that to ensure their companies could support the guarantees during the prolonged low-interest-rate environment.
Nationwide’s approach is to keep the original living benefit rider (today’s version), add two new riders to vary the lineup by needs and age, and to charge for whichever rider the customer selects.
A single-life rider currently costs 1.2 percent of the current income benefit base for both L.Inc and Lifetime Income Capture, and 0.8 percent for Lifetime Income Track. The maximum cost in each of these riders is 1.5 percent.
The L.Inc product (full name, Lifetime Income Rider) debuted in 2006, at a cost of 0.6 percent of the “income benefit base” (the value used to calculate the income stream). So the cost for today’s version has gone up since then, as have most living benefit riders from that earlier period that still remain on the market.
The individualized approach
In discussing how one-size-fits-all is no longer sustainable, Financial Finesse’s Davidson was referring to workforce issues, but her points have relevance in terms of insurance product approaches.
People are “more individualized in terms how they learn best and what motivates them to take action and ultimately improve their financial habits and behaviors,” she said. As a result, companies need to adjust to the different needs.
The three-rider living benefit suite seems to be fashioned along those lines, but for buyers, not workers.
The original rider, L.inc, which is aimed at people seeking certainty in retirement income, offers a rollup rate of 7 percent simple interest with a duration of 10 years. (A rollup rate refers to rate of growth credited to the income benefit base. Duration refers to how long the rollup rate will apply.) Investments in this rider are limited to a maximum equity exposure of up to 50 percent or 80 percent, depending on the options selected.
The Lifetime Income Capture rider, aimed at people willing to trade off some certainty for upside potential, bases its rollup rate on the monthly 10-year Treasury constant maturity rate plus 3 percent with a 15-year duration. Its investment options are set at five managed volatility funds with up to an 80 percent equity exposure.
The Lifetime Income Track rider targets cost-conscious, younger consumers. It has no rollup rate, and so no duration period. It offers an annual high-watermark income benefit guarantee, and allows a maximum equity exposure of 70 percent to 80 percent, depending on the options selected.
Nationwide is predicting that younger clients will gravitate to the two new riders, largely because of the upside potential to get more income than initially planned. The lower price in the Lifetime Income Track rider will be a motivator for younger buyers, too, he predicts.
Advisors have been asking for this, he said.
There is no difference in advisor compensation between any of the riders, Henderson said, so advisors have no monetary incentive to sell one over the other. “Each product makes sense in different ways, for different people.”
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at firstname.lastname@example.org.
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