Indexed Annuity GLWBs: a Decade of Change
March 29, 2016 by Sheryl J. Moore
Indexed annuity Guaranteed Lifetime Withdrawal Benefits are nearly as old as my business! Happy birthday, IA GLWBs!
It has now been more than a decade since I developed the concept of offering Guaranteed Lifetime Withdrawal Benefits on fixed and indexed annuities. What was the motivation behind this? One question- “If guaranteed lifetime income is the greatest value proposition of deferred annuities, why do only 2% of clients annuitize?” The answers would lead to a product development quest. I performed countless hours of research with insurance companies, distributors and salespeople- to determine the cause for the depressed annuitization rates.
The results of our research led to three primary objections:
Annuitization Lacks Flexibility
Agents were concerned that their clients would have an emergency, need access to their monies, and not be able to tap into their funds because they had annuitized.
Annuitization Doesn’t Pay
Most insurance companies at the time did not pay agents a commission, upon annuitization of deferred annuity contracts. Those that did, limited commissions to 2%-3% (as a point-of-reference, deferred indexed annuity commissions averaged 8.26% ten years ago).
Annuitization = Loss of Control Over Assets
Agents wanted the ability to 1035 the deferred annuity to earn a new commission on the contract (surrender charges outstanding, or not). Just keeping it real, folks.
Given these objections, how could we as an industry get agents to discuss the guaranteed lifetime income that annuities provide with their clients?
Enter the Guaranteed Lifetime Withdrawal Benefit, or GLWB.
Initially, GLWBs were developed for use on Variable Annuities (VAs). These optional benefits gave the VA purchaser a way to have some sort of guaranteed income option, despite the fact that they were purchasing a risk money product. In fact, GLWBs drove VA sales, with election rates for the riders ranging anywhere from 70%-80%!
Yet, fixed and indexed annuities were safe money products, with a guaranteed minimum return AND guaranteed income options. What value could a GLWB offer on a fixed or indexed product? Well, it could get rid of our three objections (above)…
And so, we tried it: an alternative to annuitization.
And it worked!
Most recently, 57.9% of the $15.5 billion in indexed annuity sales elected a GLWB. Take that a step further, and realize that an average of 7.9% of these purchasers have already turned-on their guaranteed lifetime income under their GLWB- we beat annuitization by a long haul!
Initial GLWB designs were simple. They generally credited a compounded interest rate over a ten-year period, with an option to re-up for an additional ten years; all in exchange for an annual fee that was a percentage of the Account Value. Today, GLWB designs run the gamut and have become increasingly complex in an effort to differentiate and offer “competitive” riders amidst the newest set of annuity mortality tables. Increasingly, insurers are turning to “stacking” GLWBs, which guarantee a nominal compounded interest rate over ten years, along with an indexed interest component. I have to admit that riders today look so much different than anything I had ever imagined ten years ago!
That being said, I welcome the product development and the mere opportunity to talk about the greatest value proposition that deferred annuities offer.
Go guaranteed lifetime income!
Sheryl J. Moore is President and CEO of Moore Market Intelligence, an indexed product resource in Des Moines, Iowa. She has nearly two decades of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at sjm@indexedrockstar.com.
Wink’s Note: To feature Sheryl’s article on your website, please contact Jamie Johnson, Wink’s Communications Specialist at jamie@winkintel.com to obtain permission.
