Better Expense-To-Benefit Tools Can Help VAs Survive: Analysts

Calculating the value of lifetime income riders against expenses is something advisors need to pay attention to in the new regulatory environment.

Lower expenses don’t necessarily correlate to a better variable annuity for the client because of other factors such as asset allocation and rate of withdrawals.

Advisors are trying to juggle the best annuity benefits for clients, while seeking accurate expense-to-benefit ratio tools to help protect them in an era of regulatory pressure.

For example, lifetime withdrawal riders allow retirees to receive income for the rest of their lives, even if the account value drops to zero.

Annuity companies charge extra for the riders, however, so there’s a cost-benefit analysis to be done. The advisor needs to figure out which riders are the best fit for the needs of a client, particularly as a fiduciary era takes hold.

A new software tool, branded as Variable Annuity I.Q., is designed to shine more light on the value of lifetime withdrawal benefits attached to VAs could help advisors in their annuity selection process.

“The Department of Labor’s fiduciary rule has been eliminated but now (tighter regulations are) under review by the SEC,” said Kevin Porter, chief revenue officer for the analytics firm Hedgeness, which markets the software.

Institutional-Level Analytics

Advisors should think of the tool as “bringing institutional-level analytics to the retail advisor market,” Porter said.

Quantification of the variable annuity is “very much an imperative in today’s market environment,” he added.

“The variable annuity market has been lacking a standardized platform not only from the advisor’s perspective, but from the insurance carrier’s perspective too,” said Jay Singh, CEO of Chicago-based Hedgeness, in a news release.

VAs with income riders make up the bulk of the trillion-dollar VA market and many people consider a lifetime income stream vital in replacing the role of the defined benefit pension, to which fewer people have access.

New product introductions, higher crediting rates for guaranteed living benefits and the loosening of investment restrictions are expected to help VA sales rise by 5 percent this year over last year, LIMRA analysts forecast.

VA sales were $96 billion last year, down 9 percent from 2016.

Sample Scenario

The software illustration compares different VAs with lifetime withdrawal benefits from seven top annuity companies.

An analysis was run for a hypothetical retired couple electing joint/spousal lifetime withdrawal benefits taking out between 4 and 5 percent annually starting one year from the date of purchase.

Allianz’s Connections VA with the Income Protector withdrawal benefit rider had the lowest expense-to-benefit ratio with a score of 40.59.

Jackson National’s Perspective II with the LifeGuard Freedom Flex lifetime withdrawal rider had the highest expense-to-benefit ratio with a score of 52.03.

Brighthouse Financial’s Series VA with the FlexChoice Access lifetime withdrawal rider ended in the middle of the pack with a score of 49.28.

Allianz’s Connections VA with Income Protector had the lowest expense-to-benefit ratio, in part because the product had high restrictions on asset allocations into the subaccounts.

Interplay Between Expenses and Income

“The higher the expense-to-benefit ratio, the more valuable the interplay between the expenses and income benefits when it comes to income distribution,” Porter said.

Benefit variables include the specific features of the lifetime withdrawal riders, the cost of derivatives and a credit rating weighting factor.

Expense variables include the income benefit rider charge, subaccount management fees and mortality and expense fees.

Other companies such as Morningstar offer VA analytics but those services are often only available to or priced for institutional clients.

VA I.Q. is available on a subscription basis -- so the larger the company and the higher the number of users, the lower the per-person usage fee, Porter said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]