No Plain Vanilla Annuities Here
May 13, 2013 by Linda Koco
By Linda Koco
AnnuityNews
Following insurance company mergers or acquisitions of business capabilities, the new products that roll out from the buying companies tend to have certain unmistakable characteristics. Or so the industry lore goes.
In particular, the first issues of a now larger company tend to be serviceable, even contemporary, designs. But no one is really expecting breakthrough products for awhile, or even new products that say hello to the competition. After all, the buyers tend to use available resources to integrate their new acquisitions, not to unveil well-endowed products.
In recent months, however, two annuity carriers have taken the path less traveled. These companies have been involved in major annuity-related transitions in recent times but have unveiled new annuities that are anything but plain vanilla.
One rollout is the TargetBenefit Annuities, an indexed annuity series from Aviva USA and the other is ForeRetirement, a variable annuity from Forethought Financial Group.
Aviva USA, a known sales leader in the indexed annuity industry, is currently in the process of being sold to Athene Holding and will start operating as Athene USA once the deal closes later this year. As for Forethought, it is no stranger to the fixed annuity business, but last year, the carrier turned heads when it bought the individual annuity business capabilities from The Hartford, a one-time big player in the variable annuity market.
Those big changes have set the annuity world to wondering if and how the carriers’ new products would be affected. Will they have punch or not?
Now, the wondering is over. The new annuities of both carriers have the look and feel of advanced design, and they include some surprises, too. Some of this gets technical, but annuity watchers will want to know.
The Aviva annuity
The first thing to notice about the new TargetBenefit Annuities series is that it brings accumulation back into indexed annuity discussion, said Lance Sparks, senior vice president for annuity IMO sales and distribution for Aviva USA.
In recent years, indexed carriers have been severely limited in the crediting rates they could offer due to the prolonged low interest rate environment, he explained. Carriers make their money on interest rate spread, but with rates so low, that has been a challenge. In response, the Aviva product developers approached the new product series from the perspective of being more innovative in how they use interest, he said in an interview.
The result was a decision to include in the products two interest crediting strategies that use indices that are proprietary to Standard & Poor’s. “The indices use cash to limit volatility. We buy options on those indices but the strategies are uncapped,” Sparks said.
That uncapped feature increases the products’ accumulation potential compared to other contemporary indexed annuities, Sparks contended.
This impacts the walkaway value to the client, he maintained, because the product has the potential to pay more than a capped strategy would pay. It also impacts the death benefit, he said, noting that this benefit is based on the accumulation, not on a value in a separate account.
Finally, he said, it impacts the policy’s lifetime income benefit when certain income options and features are elected. The impact he is referring to is higher potential income.
Aviva’s TargetBenefit Annuities also offer a lot of options. For example, the series offers a fixed account and an interest-crediting strategy using the two proprietary indices (the strategy links to growth on a one-year point-to-point basis or a five-year point-to-point basis). In addition, the series offers several other strategies based on the S&P 500, plus a multiple index strategy.
“Customers can put money into whichever strategy they want,” said Sparks. “They can also move the money every year (or every fifth year with the five-year proprietary strategy).”
The series also offers two optional income riders. The Target Pay option provides for a fixed lifetime income benefit, with no indexing on the income amount. The Target Pay Plus option provides for a slightly lower lifetime guarantee but also the chance to participate in more market index upside potential via linking to any available indexing strategy, Sparks said.
These income riders are unlike many annuities today that have living benefits riders, since the TargetBenefit products have no separate income account value or withdrawal percentages to calculate, Sparks added.
In addition, the riders include a confinement benefit. Currently, this benefit will triple the customer’s income payments in case the customer is admitted to a qualified care facility.
As for withdrawal charge periods, the series offers a choice of 10- and 15-year options.
There are options when income begins, too. At that time, the customer can elect a level income option, or an inflation-adjusted income option (which will typically result in a lower payout initially, but which increases annually based on changes in the Consumer Price Index). The payout election can be individual or joint. “If inflation is a concern, we recommend taking this option,” said Sparks.
Another option is to stop guaranteed lifetime income payments after they have begun. If the customer decides to do that, the payouts remain in the contract, where they earn interest and can later be accessed as a lump sum, Sparks said.
There is a lot going on in the products, and all the optionality sounds complicated. However, Sparks contended the consumers can make the choices easily. “It’s a simple step-by-step process. The person chooses one option and then goes to the next.”
The design is also simpler than many other modern annuities, he maintains, pointing out once again that there is no rollup rate, no separate account, and no withdrawal percentage to calculate. The carrier also provides customers with a yearly “statement of benefits” that shows the annual dollar amount that their policy will pay in income benefits, regardless of market fluctuations.
The Forethought annuity
The first variable annuity from Forethought is designed for sales in the retirement market. Hence, the name—ForeRetirement.
A bare-bones or modest annuity, this is not. The contract has more than 50 subaccounts from 11 fund families, for example.
In addition, the fund companies are widely recognized brands—American Century, American Funds, BlackRock, Franklin Templeton, Hartford/Wellington, Invesco, Lord Abbett, MFS, PIMCO, Putnam and TOPS. And the product is available in B, C and L share classes.
The policy does include customary variable annuity features. For example, it has a declining surrender charge schedule (eight years), and allows penalty-free partial withdrawals during the surrender charge period.
But there are distinctive touches, too. For example, it is structured around three “retirement strategies,” each of which incorporates a daily approach to benefit calculations. Here are some highlights from the product literature.
The “live strategy” is a lifetime withdrawal feature. This is for clients who want to take retirement income from the annuity.
It guarantees lifetime withdrawals as a percentage of the policy’s “benefit base.” (The base grows with favorable investment performanceand is a value the company uses only for income calculation.)To implement the strategy, the client elects one of two options, both available for an extra cost. The “daily lock income benefit” optioncaptures new contract value highs on a daily basis (the so-called step-ups) up to age 90. The “annual lock income benefit” captures highs on an annual basis. Both options include an annual 6 percent simple-credit “deferral bonus” which applies when it is more favorable. The bonus is available until the earlier of year 10 or first withdrawal.
The “live and give” strategyis aimed at customers who want guaranteed withdrawals for lifetime income but who also want to have the potential to “give” a legacy through death benefit proceeds, Forethought said.
This strategy requires that policyowner elect a death benefit option, called “legacy lock,” along with the live strategy. When that happens, the company said, the death benefit will not reduce when withdrawals are made within the income benefit’s limits. (That is different from more typical designs, where the annuity death benefits do reduce with withdrawals.) Instead, the death benefit will equal the amount of premium invested, providing the benefit rules for each rider (legacy lock and daily lock) are met.
The “give” strategyis for clients who are focused on death benefits.
Here, when the client elects the “maximum daily value,” the policy beneficiaries will receive the highest value the contract attained, even investment losses occur after the high, the company said. Other options include the “maximum anniversary value,” which preserves the high contract value on a contract anniversary as the death benefit, and “return of premium,” which prevents the death benefit from dropping below the amount of premium invested. In each case, withdrawals will reduce the death benefit. All optional death benefits are available at an additional cost.
Serious look
Producers and distributors evaluate a myriad of factors when deciding whether to put a brand new annuity product before a client. One of those factors is whether the product has depth and flexibility, especially if the carrier is busy digesting an acquisition at time of development and rollout.
If producers and distributors see that the new product is little more than a “me-too” or smacks of “beginner-itis,” they might sniff at it but take a wait-and-see approach to selling it. But if the new product has curves, flourishes and other signs of insurance acumen, they might give it a serious look.
That’s because products with such qualities are in demand in markets where customers need sophistication and customization. More importantly, producers and distributors may decide that a carrier that invests the considerable resources required to build such a product, even while integrating new acquisitions or capabilities, is a carrier that is committed to the product line for the long term. In today’s annuity world, where change is in high gear, these can be major considerations.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.
