VAs With or Without Living Benefits: A Question Of Mortality
Advisors may be surprised to learn that some clients are thinking about their own mortality even as they consider whether to buy annuities with living benefits.
Ruark Consulting says it has found that the mortality of people who buy variable annuities with guaranteed living benefits runs about 12 percent lower than that for people who buy variable annuities without those guarantees.
So the living benefit crowd actually tends to live longer than the other variable annuity buyers.
No one is saying that the trend reflects a self-fulfilling prophecy or that it reflects a tendency of advisors to avoid selling living benefit products to less healthy people. Still, the relationship between a long life and buying living benefit products is certainly a tantalizing one for advisors to explore.
The finding is based on a survey of 17 major insurers representing more than 30 million policy years of exposure and 340,000 deaths between January 2007 and December 2011, according to Ruark.
The researchers found a similar 12 percent differential in mortality levels when it conducted its first variable annuity mortality study, which came out in 2007. That means the trend has continued from before the great recession on through the end of last year.
Heads up for advisors
The heads up for advisors is that people who tend to buy variable annuities with living benefit guarantees are likely to have an expectation that they will live a long life, says Peter Gourley, a vice president at Ruark.
It correlates with client concern about outliving retirement savings, he says. That can be a talking point during the planning discussion.
A. J. Block, an independent advisor with Carter Financial Management, Orchard Park, N.Y., says he has noticed that client decisions about electing a living benefit are often impacted by the client’s own sense of how long he or she expects to live.
In fact, he says, it is the first decision they make. “That is, if they think they will live a long time, they will consider that in deciding whether to buy annuities and life insurance, and whether to choose products with guarantees.”
Of course, “most people, when they are younger adults and unless they have a medical condition, think they will live forever,” Block says with a smile. “It’s when they get older, say in their 60s, when they start factoring mortality into their decisions. But even then, most think they will live 20 years or more.”
The second decision
<p> Another factor impacting client purchase of annuities with guaranteed living benefits is what Block calls “the second decision.” This is the decision to compare the annuity with what the client can earn elsewhere, on a guaranteed basis, in today’s low interest rate environment.
Interest rates are so low today that certain clients think it’s time to get into an annuity that will guarantee benefits in the future, the registered rep explains.
Back in the 1980s and 1990s, interest rates were so high, people wouldn’t even look at annuities, he recalls. They would say, “Why would I ever want that, when I can earn more elsewhere?” He remembers how people turned away from annuities earning 5 percent to 7 percent internally, because they thought the higher rates they found elsewhere would go on for a long time. They didn’t imagine anything else.
That sense of going on for a long time is a factor today as well, he says, but in reverse. Today, the best interest rate a person can get elsewhere is 1 percent or maybe 2 percent, he explains. So now people tend to think that these very low interest rates will just continue on and on. This may sound irrational to financial people, but that’s what certain clients think and expect, Block says.
This expectation is contributing to making annuities with living benefit guarantees look very attractive.
When mortality doesn’t count…
Mortality issues are not a factor for one group of clients, however. These are people who have a chronic medical condition or a family history of relatives with chronic conditions or early death. Those clients believe they will not live a long time, so the first decision about living benefits—will I be around to benefit from this feature?—is not a factor, says Block.
For them, other aspects of the annuity are more important, viewed in comparison to the interest rate environment.
Mortality issues could also become a non-factor if interest rates should rise very high or if the stock market soars. Those changes could spur some clients to want to go for the higher rates or take on more risk in the stock market. In such cases, longevity could lose its influence in client decision-making, predicts Block. Some clients may reject more conservative options and think very little about their own mortality, even if they are older.
The advisor’s job in such a time would be the same as it is now, he adds. That is, the advisor will need to focus on helping clients take a logical look at their situations and what could happen later on, he says. “A good advisor will show all the different effects, so the client can make a good decision.”
Pricing probably won’t be impacted
Ruark’s Peter Gourley points out that the lower mortality finding does not mean that advisors should brace for a sudden spurt in price increases in annuities with guaranteed living benefits. “The major variable annuity carriers have probably already made changes to pricing based on mortality assumptions,” he explains.
The key for advisors is to remember that mortality issues are - likely in mind during living benefit discussions with annuity prospects. Even if unspoken, it’s right there in the middle of clients’ concern about outliving their money.
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