Skimpier living benefits could kill interest in VAs, advisers warn

Financial advisers are calling on insurers to enhance their suite of variable annuities, saying that 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 the Insured Retirement Institute’s 2011 marketing conference in Washington last week.

The advisers on the panel said that the reduction in living benefits, along with higher fees, ultimately might 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 panelist Jason Tawney, a financial adviser with Edward Jones.

Advisers lamented some of the more drastic product changes that have taken place.

Panelist Scott McCaskill, a partner at Voso Financial Advisers LLC, said that a wholesaler told him that the insurers view their annuity businesses as liabilities and not assets. He also said that insurers 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 Benmosche, chief executive of American International Group Inc., said that insurers that face problems 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,” he said.

In 2008, insurers struggled with books of VA business that either had 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 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 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 variable annuities to 5%, from 6%.

MetLife Inc. will also reduce the annuitization rate in its income benefit for new sales as of Feb. 28. Compared with the old annuitization rate, the change would lower the amount that a client could get once he or she annuitized the contract.

Noting 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 insurer, which he wouldn’t identify, cut down its selections to 12 subaccounts.

“Having 40 isn’t even close to what we need,” Mr. Lockwood said. “We’re in the grow-and-protect mentality, and we need those asset classes to be able to do that.”

Mr. Lockwood also said that he is a proponent of fee-based variable annuities. His broker-dealer, LPL Financial, is expanding its platform to accommodate more of these products.

But none of the advisers thinks that adoption of fee-based annuities will come easily.

“It’s going to take a lot of work from all of us,” Mr. Lockwood said.

“It depends on the adviser and if they have a profitable business and can afford to take less compensation,” he said. “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.”

E-mail Darla Mercado at [email protected].