Taking off the glitz

To make their variable annuities more attractive, insurers revved up living-benefit features last year. This year, some top VA sellers are hitting the brakes and trimming benefits.

The reason is that today’s low interest rates are making it more expensive for life insurers to provide popular features such as lifetime-withdrawal-benefit guarantees.

Two of the largest VA sellers, Prudential and MetLife, are pulling back.

VA leader Prudential Financial Inc. last month reduced the amount by which a client’s income base would grow, among a variety of other changes. Previously, lifetime income was based on 6% compounded growth on the annuity’s highest daily account value. That’s now down to 5%.

In addition, annuity holders must refrain from withdrawals for 12 years — up from 10 — in order for their protected value to grow by 200%.

The No. 2 VA seller, MetLife Inc., also has adjusted its guaranteed-minimum-income benefit due to lower interest rates.

After adjusting its internal calculations, MetLife lowered the income annuity that holders will receive when they activate the GMIB rider. The change affects new business written after Feb. 28.

Insurance executives contend that the changes are necessary. Near zero interest rates raise the present value of future benefits, meaning that the insurer must charge more to deliver the same benefits, reduce future benefits, hedge more risk or do a combination of all three. As carriers hedge to reduce the impact of low interest rates over an extended period, their costs rise.

“What we promise to the customer is a series of guaranteed payments they can’t outlive,” said Bennett Kleinberg, a vice president and senior actuary at MetLife. “The lower the rates, the more valuable the option we sold to the policyholder and the more sensitive the liability is to the next change in interest rates.”

ADVISERS UPSET

The changes have ruffled advisers who are fans of certain VA features. In some cases, it’s led to them to look elsewhere for attractive guarantees.

Ohio National Financial Services Inc., for instance, launched a lifetime withdrawal benefit in the fourth quarter that offers an 8% simple interest growth on the original payment.

“Ohio National gives you an annual reset [a step-up to lock in market gains], 8% off of the market’s high-water mark, which is great,” said Thomas B. Hamlin, a branch manager at Somerset Wealth Strategies, an affiliate of Raymond James Financial Services Inc.

Another option advisers are weighing is Transamerica Corp.’s withdrawal benefit, which has monthly resets, and charges fees according to what investors select.

The insurer’s Retirement Income Choice 1.2 rider provides 5% annual compounding growth. It charges clients lower fees if they select more-conservative investments.

OTHER CONTENDERS

Richard Dragotta, a branch manager with LPL Financial, likes Protective Life Insurance Co.’s SecurePay Withdrawal Benefit, which allows the withdrawal benefit base to increase by 7.2% each year over 10 years.

“They have a competitive story,” he said. “I think Protective has taken on a lot of sales because of that.”

Advisers also like products from Jackson National Life Insurance Co., the third-largest VA seller, which has benefited from its competitors’ decisions to adjust for lower interest rates.

In October, the carrier released its LifeGuard Freedom Flex, which allows clients to select an annual bonus ranging from 5% to 8% in years with no withdrawals. Buyers also can select annual or quarterly opportunities to lock in investment gains and choose from an array of 99 investment portfolios. Costs are tailored to the features the customer chooses.

There are limits, of course. For instance, the 8% annual bonus is available only with annual step-ups. Indeed, some advisers find this level of customization a little overwhelming.

“Jackson has a complex benefit — I’m confused with all these options,” said Jim Saulnier, an adviser at an eponymous firm.

“This most recent change makes the Jackson product even more attractive to clients,” said Mark Cortazzo, a senior partner at Macro Consulting Group.

“I would characterize these changes not as guarding against risk — we feel comfortable with the risk and our ability to manage it effectively — but as enhancements to the feature offering,” said Steve Kluever, senior vice president of product and investment management for Jackson National Life Distributors LLC.

Advisers have mixed feelings on whether the changes by the largest VA sellers will affect sales.

“I think you’ll see Jackson go to No. 1,” said Mr. Saulnier. “MetLife has a good steady position [along with Axa Equitable Life Insurance Co., another well-known GMIB provider] and a great death benefit.”

“Prudential still has the highest daily step-up, so that decrease from 6% to 5% isn’t such a big deal,” said Rich D. Picone, a registered representative at Picone Financial Partners LLC, an affiliate of LPL Financial.

“For advisers and clients who focus on yield or credit, Prudential is in line with everyone else, but a few firms might evolve if people are looking for the highest credit,” Mr. Dragotta said.

“[Prudential’s] move makes their product blander,” Mr. Hamlin said.

Prudential’s move follows the market, said Bruce Ferris, executive vice president of sales and distribution at Prudential Annuities. “When the dust settles, I think we still have a compelling and leading value proposition with these product changes,” he said.

NO ONE-SIZE-FITS-ALL

Still, the changes pose a challenge for advisers.

“A couple of years ago, VA contracts were like Swiss army knives: You could use them for different situations and income needs, and add death benefits,” Mr. Cortazzo said.

“Now companies are hedging some risks and not others,” he added. “The one-stop shop has really disappeared and the solutions for clients are now much more specific to the situation.”

E-mail Darla Mercado at [email protected].