Skimpier living benefits could kill interest in VAs, advisers warn

Advisers are calling on insurers to enhance their current suite of variable annuities, saying clients are turned off by falling accrual rates on living benefits and insufficient investment choices.
“There’s going to come a point in time where not only will the investor not want to [purchase a product with a reduced living benefit], but the adviser will give push-back, too,” said Doug Lockwood, principal of Harbor Lights Financial Group Inc., an LPL Financial affiliate.
He spoke on a panel of advisers at an Insured Retirement Institute conference in Washington yesterday.
The advisers on the panel said the reduction in living benefit, along with higher fees, might ultimately force them to stop recommending variable annuities to clients.
“Living benefits are so crucial and important, and we believe it’s right for the client in many situations,” said Jason Tawney, a panelist and financial adviser with Edward Jones.
Advisers lamented some of the more drastic product changes that have taken place. Scott McCaskill, a partner at Voso Financial Advisers LLCand a panelist, said a wholesaler told him that the insurers view their annuity businesses as liabilities and not assets. He also said that carriers will dangle a tantalizing product feature and then yank it from the market.
“A company will offer a living benefit, and then it’s gone; you might see benefits offered for a short period of time,” Mr. McCaskill said. “They’ll say that this is their comfort level [of sales] and then close off.”
During a speech at the same conference, Robert Benmosch, CEO of American International Group Inc., said that carriers facing problems today have placed too much weight on variable annuities offered with certain features. Offering advisers a variety of products and riders, including withdrawal, income and death benefits for variable annuities, “helps you to be an evergreen player in the market,” Mr. Benmosche said.
Back in 2008, insurers struggled with books of variable annuity business that had either been mispriced or poorly hedged, leaving them vulnerable to low interest rates and high volatility in the equity markets.
In the past, “we only had to only deal with mortality, and now we’re asking people to deal with interest rates, mortality and equity markets,” Mr. Benmosche said. “You’re starting to see some companies starting to withdraw, and I’m worried on whether other companies have too many eggs in that one basket and can’t diversify the risk.”
Certainly, low interest rates have led some life insurers of late to pull back on certain product features on their variable annuities. For instance, Prudential Financial Inc. reduced the compounded growth on the protected value in its VAs to 5% from 6%.
MetLife Inc. will also reduce the annuitization rate in its income benefit for new sales as of Feb. 28th. Compared to the old annuitization rate, the new change would lower the amount a client can get once he or she annuitizes the contract after the account value falls to zero.
Mr. Lockwood also noted that the number of investment options on older contracts has dwindled, Mr. Lockwood called for an open-architecture investment program “so that we’re not restricted to 100 options — maybe we can have something similar to what’s on our fee-based platform.”
One carrier, which he wouldn’t name, cut down its selections to 12 subaccounts. “Having forty isn’t even close to what we need,” Mr. Lockwood said. “We’re in the growth and protect mentality, and we need those asset classes to be able to do that.”
Mr. Lockwood also said he was a proponent of fee-based variable annuities. His broker-dealer, LPL Financial, is currently expanding its platform to accommodate more of these products. But none of the advisers believed that adoption of fee-based annuities would come easily.
“It’s going to take a lot of work from all of us,” said Mr. Lockwood.
“It depends on the adviser, and if they have a profitable business and can afford to take less compensation,” he added. “I think it’s going to take a forced action, that this is the way it’s going to be done and that this is the only way.”