Posted on October 22, 2012 at 10:00 PM Comments comments (0)

Several Variable Annuities Carriers Exit Biz

Several well-known life insurance carriers are making a surprise exit from the variable annuities business, while others are drastically scaling back their exposure or evaluating their participation in 2012.

The combination of a volatile stock market and a prolonged low-interest-rate environment has made it both difficult and expensive for life insurers to hedge variable annuities with living benefits, according to a Dec. 18 article byInvestment News. As a result, many insurers are opting to limit their exposure to those hedging costs by exiting, or scaling back, their VA business, the article says.

In 2011, two big VA players – Genworth Financial and Sun Life Financial – announced that they would be leaving the variable annuities market. Others like Jackson National Life Insurance Co., MetLife Inc. and Prudential Financial are making plans to eliminate living benefits and limit investment options.

In addition, John Hancock Life Insurance Co. announced in November that it planned to withdraw an array of annuity products, including variable annuities, as well as limit distribution of existing products to only a small number of broker/dealers.

A variable annuity is a contract between you and an insurance company whereby the insurer agrees to make periodic payments to you beginning either immediately or at some future date. In return, you agree to purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.

In general, variable annuities are designed to be long-term investments to meet retirement and other long-range goals. They are not suitable for meeting short-term goals because substantial taxes and insurance company charges if money is withdrawn early. Variable annuities also involve certain investment risks.

Increasingly, variable annuities have become the focus of a growing number of legal disputes and investor complaints. Earlier this year, an arbitration panel of the Financial Industry Regulatory Authority (FINRA) awarded a Texas man and the estate of his deceased wife $1.7 million, after finding that an independent contractor, Paul Davis of Raymond James Financial Services, sold life insurance and variable annuity products that were inappropriate investments given the couple’s age and risk tolerance.

According to FINRA’s ruling, Davis sold the couple’s $3.8 million portfolio (which had been heavily invested in municipal bonds) in favor of life insurance and annuity products. He then invested in one annuity after another from 2002-2006, causing the Texas couple substantial financial penalties.


Annuity Income Riders And Living Benefits

Posted on September 1, 2012 at 1:20 AM Comments comments (0)

Income riders have become one of the most popular benefits ever to be added to fixed deferred annuities. Members of the National Association for Fixed Annuities (NAFA) report that more than 50 percent of people who purchase fixed deferred annuities also choose to add an income rider. These income riders are also known as guaranteed lifetime withdrawal benefits (GLWB) or guaranteed lifetime income benefits (GLIB).

The first income riders were introduced on variable annuity products in 2003, and became available on fixed and fixed indexed annuity products a few years later. Income riders provide consumers with a guaranteed income for life (similar to what annuitization provides), but without having to give up access to remaining principal -- a feature that caused many consumers to shy away from annuitization in the first place. By purchasing an income rider on a fixed rather than a variable annuity, the consumer benefits from the income rider while also being protected from investment risk.An income rider on a fixed or fixed indexed annuity allows a retiree to build a secure retirement income. The issuing insurance carrier guarantees the payout provided by the income rider for the life of the annuity owner, as well as bearing all of the investment and longevity risk on the guaranteed payout -- which means that the consumer is completely protected from these risks. Some annuity carriers even provide for the income to substantially increase in case the annuity owner is confined to a nursing home, further sheltering the annuity owner from risk. In addition, the annuity owner retains access to the annuity's remaining value and continues to reap the benefits of interest credits to the annuity's value.

How income riders work

Again, a guaranteed lifetime income or withdrawal benefit is typically optional on a fixed annuity, and is added to the annuity by a rider. Whereas the annuity has an accumulation value to determine the death benefit or annuitization, the rider also adds a second value: the income value. The accumulation value works just as it always does on a fixed annuity. The annuity owner's premium earns additional interest that is declared and guaranteed in advance or guaranteed through a calculation of the performance of an index (or indices), while at all times promising a minimum guaranteed interest. The unique benefit of a fixed indexed annuity (FIA) is that it has a built-in inflation hedge because additional interest is calculated based on a formula tied to the designated index (e.g., S&P 500).

 With income riders, the income value is completely separate from the accumulation value. It typically grows at a fixed rate of interest, and when the retiree elects to start taking lifetime withdrawals, a payout factor is applied to the income value to determine the guaranteed annual withdrawal. If the accumulation value is higher than the income value when the policyholder decides to withdraw the income, then the accumulation value is used in the payout calculation instead. Once the amount of guaranteed withdrawal is calculated, the retiree may withdraw that amount from the annuity every year for life.

 While taking these withdrawals, the retiree is provided with two very valuable guarantees.

Although the annual withdrawals are deducted from the accumulation value, the additional interest (declared or indexed) continues to be credited to the accumulation value, and the retiree retains access to the remaining accumulation value at all times.Even if the annual withdrawals ultimately deplete the accumulation value, the issuing carrier must continue making the annual payments as long as the retiree lives.