Insurance firms offering investment-only variable annuity products have been tacking on death benefit options for investors as a way to offer more choice in a growing marketplace.
Nationwide and AXA Equitable Life Insurance Co. have launched IOVAs with a death benefit option this year, and
Lincoln Financial Group is aiming to launch one in mid-November.
That follows the products that other firms, such as Metropolitan Life Insurance Co., Principal Financial and American International Group, debuted in 2014, according to Morningstar Inc.
“There's no downside for an insurer to issue an IOVA with an optional death benefit, provided it's optional. It gives them the ability to meet more demands from more people,” said John McCarthy, senior product manager for wealth management products at Morningstar.
IOVAs, also referred to as investment-oriented or investment-focused variable annuities, are essentially stripped-down versions of more traditional variable annuities that have features such as living benefit riders. IOVAs are meant to be a tax-deferred investment play, offering a wider array of investments and a lower price tag when compared to traditional VAs, advisers and insurance executives say.
Many IOVAs, like a standard deferred annuity, have a standard death benefit built in that returns the contract value at no additional charge. Insurers are beginning to debut death-benefit options such as a return-of-premium benefit, which come at an additional cost. Return of premium is typically the cheapest type of death benefit investors can purchase through other annuity contracts, according to industry experts.
Lincoln, for example, rolled out its Investor Advantage IOVA in 2014. It plans a Nov. 16 debut for Earnings Optimizer, the death benefit to be associated with Investor Advantage, which will include a return-of-premium option. A spokesman declined to provide additional information because it hasn't been filed yet with the Securities and Exchange Commission.
AXA
launched its Investment Edge IOVA in 2013, but only earlier this year
came out with Investment Edge 15.0, which provides the option for a guaranteed minimum death benefit and a return-of-premium benefit.
Nationwide debuted a Destination Freedom+ IOVA this year, with a
return-of-premium option as well as one for a highest-anniversary enhanced death benefit. At death, the latter would pay out the greater of the current contract value, net payments made to the contract, or the highest contract value on any contract anniversary for the investor's 80th birthday.
“We feel options are good. I can get the lowest cost if I want without the death benefit, but if I want it I can pay a little extra for it,” said Eric Henderson, senior vice president of individual products and solutions at Nationwide.
IOVA GROWTH
IOVAs have seen strong sales growth over the last few years, as
overall variable annuity sales have floundered.
IOVA sales experienced 20% year-on-year growth in the second quarter of 2015, to $10.9 billion, according to an analysis by the Insured Retirement Institute. Sales are up 93.8% from $5.6 billion in the second quarter of 2011.
Overall VA sales, at approximately $67 billion as of the second quarter, are down 15.5% over the same time period.
Source: Insured Retirement Institute analysis of Morningstar data
Note: *In millions
“The flows going into IOVA products are definitely increasing, and at a pretty rapid rate,” Mr. McCarthy said. He estimates growth will remain strong at least through year-end due to large carriers having launched products recently, which likely will garner flows.
Scott Witt, owner of Witt Actuarial Services, said the IOVA death benefits give policyholders peace of mind that the worst-case investment scenario is that their heirs will get back their original investment.
“People like guarantees and downside protection … and it's a marketing story that sells,”he said. “This [return-of-premium death benefit] is just another variation of that.”
Of course, that protection comes at a price, Mr. Witt said.
The Nationwide return-of-premium benefit costs 20 basis points, while the highest-anniversary option is 30 bps, for example.
MetLife's Investment Portfolio Architect IOVA has a return-of-premium benefit
that costs an additional 25 bps.
Because the additional benefit is relatively inexpensive for clients, the ability to pass along the full principal value to beneficiaries even in down markets could be an attractive one, according to Mark Cortazzo, senior partner at MACRO Consulting Group.
“That's appealing for me for pennies difference,” Mr. Cortazzo said.
Mr. Witt, though, said those investing to pass on assets to the next generation represent a “small sliver” of annuity investors. If clients want death benefit protection, term life insurance may be the better play, he said.
“I don't find those guarantees to be very logically appealing,” he said. “Most people with annuities are saving for their own retirement, and by definition, once they're dead they didn't outlive their assets.”
