Insurers Rescue VAs With Creative Death Benefits

Variable annuity sales may be slumping but that hasn’t stopped some insurers from tweaking the death benefits that come with the variable products.

The tinkering is a sign that despite slowing variable annuity sales, consumers and advisors still value the benefits that can be passed on to heirs, market experts said.

After all, sales trends and market movements come and go but death is certain.

The tweaks around death benefits can be grouped around three categories, said Brian Kroll, head of annuity solutions for Lincoln Financial Group.

The tweaks include protecting initial principal, locking in the high point of market gains and offering a death benefit that grows at a stated percentage, he said.

Principal protection covers beneficiaries if the owner dies when investment markets are low, while locking in a market high point protects against the annuity owner’s untimely death. A growth mechanism means the benefit accumulates over time.

When variable annuities are bought specifically for the accumulation phase, the death benefit becomes more of a point of focus, Kroll said. The advisor is targeting growth over time and wants to protect beneficiaries in the accumulation of that value.

Costs for the death benefit sometimes show up within mortality and expense changes, or may simply be deducted from the account value on a quarterly basis, he said.

Costs Lurking in the Fine Print

On May 9, Jefferson National, Nationwide’s advisory business, launched a new optional guaranteed return of premium enhanced death benefit for Monument Advisor contracts, a flat-fee, investment-only variable annuity.

The enhanced death benefit guarantees the value of the premiums deposited into the contract, minus any adjusted partial withdrawals, the company said.

Monument Advisor charges a maximum annuity fee of 0.30 percent of the average daily contract value for the return of premium enhanced death benefit rider.

On May 1, Prudential Annuities announced the launch of Legacy Protection Plus, an optional enhanced death benefit available on the company’s Premier Retirement Variable Annuity.

The additional mortality expense and administration fees for Legacy Protection Plus are 0.65 percent for people 55 years and younger, 0.80 percent for people ages 56 to 70, and 0.95 percent for people age 71 and older, according to Prudential.

Enhancing death benefits speaks to the “continued importance of this space,” said Dianne Bogoian, senior vice president and head of product for Prudential Annuities, the retail annuity unit of Newark, N.J.-based Prudential Financial.

“Death benefit options have long been core features of deferred annuity contracts, both variable and fixed, because they offer important opportunities both to protect value in a ‘die too soon’ scenario as well as enable and protect tax deferred growth of assets that are specifically earmarked for legacy,” she said.

Last year, Lincoln, based in Radnor, Pa., introduced an Earnings Optimizer death benefit rider on its Investor Advantage variable annuity as a buffer to offset estate taxes when assets are passed on to beneficiaries.

Current annual charges for Earnings Optimizer B- and C-shares are 0.40 percent of contract values for people 69 years old or younger and 0.70 percent for people between the ages of 70 and 75.

Keeping up With the B-Shares

Annual benefit “step ups” in addition to the more common return of premium clauses have been a staple of commission-based variable annuities, but these benefits are now making their way into fee-based variable annuities.

“It’s not so much that there’s anything new out there, it’s more than the I-share contracts want to keep up with the B-share contracts,” said Kevin Loffredi, senior product manager of annuity solutions for mutual fund tracker Morningstar.

“It shows that there’s value in those death benefits,” he said.

A record 26 filings for fee-based variable annuities were reported in the six-month period beginning Dec. 1 and ending in May, Morningstar said.

New filings for fee and commission-based variable annuities typically number about a dozen over a 12-month period.

Insurers want to release more fee-based variable annuities to give advisors and distributors new options under the Department of Labor’s fiduciary rule, which takes effect next week.

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

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].