Owners of fixed indexed annuities (FIAs) with guaranteed living income benefit (GLIB) riders are much less likely to surrender their contracts than they were 10 years ago, according to new research based on 3.3 million policyholders.
The trend is a sign that buyers of FIAs with living benefits hold on to their contracts and use the riders for the reasons they were designed, said Timothy Paris, CEO of the consulting firm Ruark, which conducted the study.
“From a financial advisor’s standpoint, the data is emerging that folks are using the products in large measure for the purposes they were built for – to provide an increased level of income in retirement,” Paris said.
Tracking policy behavior through the data has value to insurers who develop the riders and to advisors who sell them.
Surrenders the year following the end of the contractually defined surrender charge period have fallen from more than 50 percent in 2007 to between 15 percent and 25 percent in recent quarters, the research found.
Surrender rates during the surrender charge period have also fallen, from high single digits to below 3 percent, Ruark found.
In addition, surrender rates during the surrender charge period for contracts with living benefits are less than half those with contracts without the guarantee, Ruark also found.
Credited rates have a “discernable effect” on surrender behavior, the research found.
FIA contracts with crediting rates of less than 2 percent exhibit higher surrender rates than FIA contracts crediting more, Ruark said.
An industrywide dip in surrenders in 2016 and a subsequent rebound in 2017 was likely caused by the uncertainty surrounding the Department of Labor’s fiduciary rule and a wait-and-see approach in the wake of the presidential election, Paris said.
With the bulk of FIA sales with living benefit riders issued over the past eight to 10 years, the Ruark study incorporates significantly more data on policies with living benefits past the expiration of the surrender charge.
Surrender charges levied by insurers are designed to discourage people from turning in their annuities early. However, once the surrender charge period expires, contract holders are free to move their annuity to another insurer.
Ruark’s research, which is conducted for actuaries who set pricing models and hedging strategies, is based on policies spanning a period from January 2007 to Sept. 2017.