Variable annuities: It's the income, stupid

Even though guaranteed-income benefits are not as generous as they used to be, the feature continues to be the big selling point for advisers and clients when considering variable annuities. Low interest rates and volatile equity markets have made it costly for insurers to continue offering attractive living benefits such as high roll-ups — growth of a customer's benefit base, which is used to calculate lifetime income —and withdrawal percentages of close to 7%. A typical withdrawal percentage now is around 5% and below. “What we're seeing in this environment is a steady stream of announcements from carriers, changes to the product lines and rate decreases,” said Cindy Reed, president of Sammons Annuity Group and Sammons Securities Co. She was a panelist at the Insured Retirement Institute's annual conference in San Diego on Monday. Still, guaranteed income continues to be exactly what clients and advisers are craving as part of their retirement planning, according to a survey from Cogent Research LLC and the IRI. A poll of 312 advisers in July and August showed that guaranteed income was the second-most important factor they considered when selecting variable annuities. Carrier financial stability came in first, and subaccount options was third. In a similar poll, 475 investors echoed the emphasis on getting a lifetime paycheck, with guaranteed income being the top reason for buying an annuity. Doing it because their adviser recommended the purchase came in second, while tax deferral followed in third. The same forces that are driving insurers to tweak their products also are encouraging annuity adoption. Seventy-one percent of the advisers surveyed said that in the past 12 months, they've had a client request an annuity. Meanwhile, nearly three-quarters of the investors who owned an annuity – 246 participants – said that annuities are a critical part of a retirement strategy, compared to 55% in 2011. “The current economic and market volatility has resulted in more-conservative investors, who are increasingly searching for investment vehicles, like annuities, that can provide market growth, guaranteed-income benefits and some level of principal protection,” said Anthony Ferreira, managing director at Cogent Research.