Guaranteed income, withdrawal, and accumulation options for variable annuities have increased dramatically in the past year, and insurers say they expect even more such riders to be introduced in 2006 as banks and other financial services providers try to tap the burgeoning retiree market.
But simplifying the options will be crucial to their success in the bank channel, according to industry observers.
Demand for living benefits - particularly those that provide benefits for surviving spouses and automatically lock in market gains - has risen as the baby boomer generation looks for ways to create a regular income stream for its now approaching retirement years, said Rob Scheinerman, a senior vice president at AIG Sunamerica Retirement Markets Inc., a Los Angeles subsidiary of American International Group Inc.
"So many people are beginning to focus on how they're going to draw income from their retirement savings," he said, "and the variable annuity is in a position to do that really well. The industry is recognizing that we have something to offer that nobody else does."
Living benefits give policyholders both principal protection and the potential for investment gains, said Greg Salsbury, president of the institutional marketing group at Jackson National Life Insurance Co. in Lansing, Mich. Jackson National Life, a subsidiary of Britain's Prudential PLC, has introduced guaranteed withdrawal and income benefits since 2004.
"They do a pretty good job of resolving an age-old investing challenge for retirees and near-retirees," Mr. Salsbury said. "There is rarely anything new under the investing sun, but this is novel."
Insurers must make sure they can afford the living benefits, however, he said. In 2002, Allmerica Financial Corp., which has since renamed itself Hanover Insurance Group Inc., was forced to stop selling variable life insurance and annuity products after the bear market made their guaranteed death benefits unaffordable liabilities.
"It's important that carriers not get into a bidding war and price the benefits incorrectly," Mr. Salsbury said.
A survey released last month by Diversified Services Group Inc., a Wayne, Pa., consulting firm, said 80% of insurance companies expect living benefits to continue growing for the next several years.
A new entry in the annuity market in 2005 was the living benefit for surviving spouses. In December, Phoenix Cos. became one of the first annuity providers to offer such an option. Its rider guarantees a minimum income stream for life to the surviving spouse.
Borden Ayers, a principal in the retirement management market practice at Diversified Services Group, said he expects more providers to offer spousal-benefit riders this year, given retirees' concerns about inheritance issues.
Living benefits with automatic step-up features that let investors lock in investment gains annually for a certain period without having to make an election each year are also expected to proliferate in 2006 as providers look to simplify riders for salespeople and clients, Mr. Ayers said.
AIG's MarketLock withdrawal benefit, launched last week, is one such option. In addition to offering the automatic step-up feature, it imposes no investment restriction on policyholders within the variable annuity contract, as many such riders do.
"It's a much simpler, customer-friendly and rep-friendly structure," Mr. Scheinerman said. "The rep or customer doesn't have to worry about missing a step-up or losing the guarantee by reallocating their investments."
Living benefit riders fall into three basic categories: guaranteed minimum withdrawal, guaranteed minimum accumulation, and guaranteed minimum income. A withdrawal benefit lets policyholders withdraw a fixed percentage - typically 5% to 7% - of their annuity premiums annually for a specified period, regardless of market performance.
Guaranteed income benefits ensure that the policyholder gets a periodic income stream that is a fixed percentage of the premium for as long as he or she lives. And guaranteed accumulation benefits promise a stated minimum contract value to the policyholder when the annuity contract is redeemed, regardless of market performance.
Diversified Services' survey said 63% of the insurance companies contacted offered at least one living benefit rider with their annuity products. Forty-four percent offered a guaranteed minimum withdrawal benefit, 40% an income benefit, and 37% an accumulation benefit.
Product simplification is essential, particularly in the bank channel, because the plethora of riders may overwhelm bank customers and platform representatives, Mr. Scheinerman said.
"Providers need to make sure that there aren't all these restrictions, all these moving parts that the rep or client needs to worry about," he said.
The MarketLock benefit includes extensive training materials for bank sales representatives to help them decide which riders are appropriate for which customers and how to balance clients' other assets, such as pensions or Social Security, with the withdrawal benefit, he said.
Though demand for living benefits has risen in the past year, regulatory pressures may hamper their growth somewhat, Mr. Ayers said. Some banks may be reluctant to sell riders because they are unfamiliar with the products and are concerned about their suitability for clients.
