In a bid to appeal to fee-based and fee-only financial advisers, life insurers are resurrecting a product intended to generate a steady stream of retirement income outside the VA arena.
So-called stand-alone living benefits combine the benefits of variable annuities that offer guaranteed- lifetime-withdrawal benefits with an investment account overseen by fee based or fee only adviser.
Here is how they work: Investors turn a lump of cash over to their advisers in exchange for a steady stream of retirement income, say, 4% or 5% a year. The insurance kicks in if and when that investment account is drawn down through systematic withdrawals or eroded by market forces.
SALBs, as they are known, were first introduced in 2008, but that introduction got waylaid by the ensuing downturn. Lately, however, interest in SALBs has been rekindled.
Aria Retirement Solutions LLC and Transamerica Life Insurance Co. will take the wraps off a SALB today. That SALB is intended to be sold by fee only advisers.
Great-West Life & Annuity Insurance Company is also planning to launch a SALB aimed at both fee- and commission-based advisers.
“The reason for creating SALBs is to broaden the tools for advisers. Advisers have a disinclination to use insurance products,” said Noel Abkemeier, a consulting actuary at Milliman Inc.
“Their approach tends to be, "If we diversify properly and manage investments well, we don't have to do anything else.' That leads them to preferring mutual funds over variable annuities,” Mr. Abkemeier said.
Insurers are hoping that registered investment advisers' desire to offer guarantees in the context of a fee-based or fee-only business model will fuel sales of SALBs.
That said, the complexity of the products poses a significant hurdle to their widespread acceptance.
“It's not an, "If you build it, they will come' concept,” said Bing Waldert, director at Cerulli Associates Inc. “Guaranteed retirement income makes sense, but I'm not sure the insurance industry has done a good job of showing advisers what this is and how to use it.”
There also are regulatory concerns.
A group of regulators at the National Association of Insurance Commissioners noted last year that it is difficult for state insurance cops to vet SALB product filings and debated whether they are annuities or a financial guaranty that is similar to bond insurance.
The American Academy of Actuaries last month filed a report with the NAIC, arguing that SALBs aren't financial guaranty products but are actually life insurance products.
“The regulatory concern is really about the fact that the insurer doesn't have the same kind of control as it does with variable annuities,” said Tamiko Toland, managing director of retirement income consulting at Strategic Insight. “The regulatory issues will eventually be resolved, but another key here is getting this style of guarantee out to a different clientele — to reach out to a set of advisers who may not be all that familiar with or crazy about variable annuities.”
Although SALBs will vary by the company issuing the coverage, the product offered today by Aria Retirement Solutions and Transamerica Life Insurance features a range of withdrawal percentages — from 4% to 8%— based on interest rates and when the client locks in his or her annual payment.
This way, a 65-year-old client who invests $500,000 into an account wrapped by the SALB is eligible for a guaranteed 4% withdrawal at $20,000 annually — if he or she decides to lock in the income benefit right now. If the interest rate rises after the lock-in, the client can obtain a higher payout amount.
In a situation where a 55-year-old client invests $500,000, benefits from gains in the market and then experiences a decline by age 65, the customer locks in the high-water mark and can obtain income based on the interest rate at the time.
Transamerica begins making annual payments to the customer — and his or her spouse, if the client elects it — only if the covered account is depleted.
Naturally, there are contingents. Transamerica won't make benefit payments if the client makes excess withdrawals or if the assets aren't allocated to investments delineated by the insurer.
APPEAL TO RIAS
The expected appeal to the RIA audience is that the client's assets aren't being held by the insurance company.
The adviser maintains control of the assets and continues to receive an advisory fee on top of the 0.85% to nearly 2% that the client pays to participate in the SALB, exclusive of fund fees.
By comparison, a typical retail variable annuity can cost about 3% to 4%, as the client isn't paying only for the guarantee but for expenses related to the variable annuity itself.
The cost of a SALB will depend on the level of risk for the selected investments. Although advisers may have a large pool of potential funds, the insurer providing the guarantee will still require allocation limitations.
“The design of these products puts parameters around the investments, so I can't just walk in with a volatile holding and get a product for it,” said Joan E. Boros, who is of counsel with Jorden Burt LLP.