Workers expect their defined contribution plans to play a greater role in their retirement income than annuities.
By Linda Koco
Guardian Life has debuted a variable annuity that includes an optional deferred income annuity rider.
The darlings of the up-and-coming annuity crowd, deferred income annuities (DIAs) are deferred immediate annuities that let the policyowner defer their retirement income start date for several years, even for 10, 20 or more years.
Until now, DIAs have been the hot-‘n-happening newbie in the retail fixed annuity marketplace. Ten or so carriers currently offer those standalone products. Based on LIMRA figures, DIA sales have risen from next to nothing a few years ago to $555 million in third quarter 2013 -- a 106 percent increase from third quarter 2012.
Now Guardian is broadening the DIA’s reach and thus changing the DIA game. The company has added a rider version of its own standalone fixed DIA to a new variable annuity, the Guardian Investor ProFreedom, a B-share variable annuity.
Putting the fixed annuity product inside of the variable annuity, offers policyholders a way to build a guaranteed income stream that will last a lifetime or for the period selected, Douglas Dubitsky, vice president-product management and development for retirement solutions, said in an interview with InsuranceNewsNet.
“It’s like building a personal pension,” he said, adding that “everybody likes having a pension.” But with this product, policyowners can do this while still investing in securities inside the same policy.
Distribution is through registered representatives of Guardian’s own platform. The contracts can be sold in both qualified and non-qualified markets.
How it works
The entire package — the variable annuity and the DIA rider — is sold by prospectus. The document contains many details about how the rider works, including the following.
The rider is offered only at time of policy issue, and at no extra cost. Customers who elect it can then transfer all or part of the variable annuity’s accumulation value into the DIA. Transfers can begin after the second policy year.
The owner chooses the DIA payout start date at the time of the first transfer.
Each transfer increases the amount of the owner’s future DIA payouts. Guardian guarantees those payments.
Money that has not been transferred can stay inside the variable annuity, where the accumulation value continues to reflect performance of the selected subaccounts.
The DIA is built on a flex premium chassis, so owners can make their transfers systematically (up to 15 transfers a year), in sporadic chunks or in one lump sum, Dubitsky said. The company essentially treats the transfers as withdrawals under the basic contract.
The DIA funds are managed by Guardian’s general account.
Minimum initial DIA transfer is $5,000 and minimum subsequent transfers are $1,000, with some exceptions. Maximum transfer is $100,000 and maximum aggregate transfer is $1 million.
How did Guardian get to the point of deciding to offer such a product? The company is committed to offering customers a way to build a guaranteed income stream for life, Dubitsky said.
While the company does continue to offer a variable annuity with living benefits guarantees, that product is only sold through Guardian’s agency force.
The new variable annuity is going in a different direction, and so needed another approach, he said. For instance, the new policy has no living benefit guarantees. And while it does include some traditional subaccount options, it also includes several alternative investment options, which don’t work well when hedging for living benefit guarantees.
The developers settled on the DIA rider because they believe it will enable policyholders to make a “seamless transition” from investing to building guaranteed income, Dubinsky said. In addition, he said:
1) Policyholders won’t have to do a 1035 exchange into an income policy at time of retirement.
2) Policyholders will have flexibility in how and when they build the income stream even as they continue investing.
3) The product will foster ongoing conversation between financial reps and clients about investing and retirement planning, not just one or the other.
“People tend to look at retirement in a boxed off way, with the retirement planning separate from investing,” Dubitsky said. By comparison, the variable annuity with DIA rider creates an opportunity to be “much more holistic.”
This ties everything together, he added, pointing to the owner’s investments, retirement benefits, and the legacy protection provided by the death benefits in both the DIA and the variable annuity.
The deferral period is two to 40 years, so this should appeal to younger buyers in their 30s and 40s as well as older people in their 50s and 60s, he predicted.
The challenge now is to provide the field with training and education on the product, Dubitsky said. Guardian is providing that training now to its own agency force. Will it do this for the other distribution channels as well? “We’re discussing that,” he said.
More variable annuity/DIA products might be on the way. Last fall, Norm Champ, director of the Division of Investment Management for the Securities and Exchange Commission (SEC), noted in a speech that the SEC staff was reviewing disclosure documents related to “deferred annuity riders” of variable annuities. His reference was to the plural, riders, not just one rider.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at email@example.com.
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