The past several months have seen a flurry of developments, enhancements and changes to variable annuity product lines.
Before delving into product details, it’s helpful to keep in mind the broader context in which the changes are being made.
Interest rates are on the rise again after a long period of decline. The equity markets are humming, buoyed by talk of peeling back regulation, lower unemployment and the promise of an entrepreneur in the White House.
New fiduciary regulations set to go into effect in April also have pushed the industry to develop more fee-based products as variable annuities come off a year of big sales declines.
Variable annuity sales reached $133 billion at the end of 2015. However, they appear to be heading for a 20 percent drop in 2016.
In the first nine months of 2016, variable annuity sales dropped 22 percent to $79.4 billion compared with the year ago period, according to LIMRA Secure Retirement Institute.
The Low-Cost ETF Solution
In December, variable annuity powerhouse Lincoln Financial Group and mutual fund giant BlackRock announced the launch of a fee-based variable annuity for advisors using exchange-traded funds, or ETFs.
Branded as “Lincoln Core Income built with iShares,” the new variable annuity is designed with only low-cost ETFs.
The product pioneers a new category, both in terms of product structure as well as targeting the registered investment advisor (RIA) sales channel. That was according to Lincoln Financial CEO Dennis Glass in a conference call with analysts earlier this month.
Lincoln Core Income with iShares, which some analysts have referred to as a passive variable annuity, is “one of the most exciting product concepts that we’ve ever delivered into the marketplace,” Glass said.
The new variable annuity is for sale in many states and Lincoln Financial is signing up its broker/dealers to distribute it.
But because of its reliance on technology and the need to integrate systems between the insurer and distributors, product sales will take time.
“The more significant sales results will probably be later part of this year and into the next year,” Glass said.
Lincoln Financial’s commission-based variable annuity families American Legacy, Lincoln Investor Advantage and Lincoln ChoicePlus have pivoted to offer fee-based options for advisors, the company said in a news release.
The fee-based variable annuity cousins have simply added the “Advisory” suffix: American Legacy Advisory, Lincoln ChoicePlus Advisory and Lincoln Investor Advantage Advisory.
New Department of Labor regulations set to come into effect in April are pushing the industry toward fee-based compensation models. However, insurance executives believe the fee-based products, properly designed, will appeal to fee-only and fee-based advisors.
The product “refresh” will “enable us to reach new advisors and we believe fee-based annuities present a significant long-term growth opportunity,” Glass said.
Whether the onslaught of fee-based variable annuities will capture the interest of retail distributors is still an open question.
Even with new pressure from the DOL, not all insurance companies are sold on the fee-based model.
“Some insurers feel confident they can sell through commission but, for some, things might change a little,” variable annuity expert Steven McDonnell, said in an interview. McDonnell is founder of Soleares Research in New York.
Insurers developing fee-based products or sticking with commission-based annuities represent a “mixed bag,” he said.
Consultants Cerulli Associates also note that in the past 10 years, only a handful of insurers had made even “halfhearted attempts” at developing fee-based variable annuities.
Lincoln Financial, a huge variable annuity seller, isn’t the only issuer in the variable annuity market to announce new fee-based products.
More Fee-Based Advisory
In January, Transamerica launched Transamerica Variable Annuity I-Share, a fee-based variable annuity offering advisors and investors more flexibility in planning for retirement.
Transamerica's Variable Annuity I-Share is available through broker/dealers and charges a fee based on a percentage of the investor's assets. There is neither a commission charge to buy the Variable Annuity I-Share nor a surrender charge, the company said.
“The investment landscape is changing, and we see that investors and their advisors want more options when choosing how they invest,” Joe Boan, senior vice president with Transamerica, said in a news release.
Insurers hope their fee-based products will boost variable annuity sales. Sales of variable annuities are on track to drop between 20 percent and 25 percent in 2016 compared with 2015 as stiffer regulations loom and as annuity money flows into fixed annuities.
In early January, Pacific Life launched a fee-based variable annuity available to advisors working through LPL Financial’s asset and wealth management platforms.
The product, branded as Pacific Odyssey, is designed to be sold under new restrictions imposed by the Labor Department’s fiduciary rule.
An LPL executive said Pacific Odyssey would meet “growing interest and demand” for fee-based variable annuity products in a post-DOL world.
“Pacific Odyssey is a cost-efficient option for LPL Financial advisors seeking a fee-based product that provides the opportunity for growth, guaranteed income for retirement and legacy protection," John White, vice president of national accounts and sales support for Pacific Life’s Retirement Solutions Division, said in a news release.
In January, Jackson National, the nation's top seller of variable annuities, announced the launch of its first fee-based investment-only variable annuity, Elite Access Advisory.
The announcement followed the company's September launch of Perspective Advisory, the company's first fee-based variable annuity.
"As advisors and their firms continue to determine how best to comply with the DOL fiduciary rules, we've seen increased market demand for products compatible with fee-based accounts," said Greg Cicotte, executive vice president and chief distribution officer for Jackson.
Still more news from Lincoln Financial, comes in the form of enhancements to guaranteed lifetime income riders available to the Lincoln ChoicePlus Assurance and American Legacy families of variable annuities.
The rider enhancements give advisors more exposure to equities, or more income through higher payout percentages, said Brian Kroll, head of Annuity Solutions for Lincoln Financial.
More equity exposure applies to the MarketSelect Advantage rider available on the American Legacy and Lincoln Choice Plus Assurance variable annuity families, the company said.
New elections to the i4LIFE Advantage Select guaranteed income benefit rider also increase equity exposures.
Higher income payouts are also available for single and joint-life contracts with new elections of the Lincoln Lifetime Income Advantage 2.0 Managed Risk optional living benefit rider.
The Lincoln Lifetime Income Advantage 2.0 Managed Risk rider is available with American Legacy and Lincoln ChoicePlus Assurance.
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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