While sales of variable annuities declined 18% to $127 billion last year, guaranteed living benefits remained popular, with 84% of policyholders electing to buy those riders in the fourth quarter, according to LIMRA data.
Jafor Iqbal, an associate managing director at LIMRA Retirement Research, said GLBs’ continued popularity is in spite of the fact that insurers spent much of the year raising costs and paring back benefits on the variable annuities, the assets of many are underwater compared to their guarantees.
Iqbal also said that 1035 exchanges were down last year, which is a testament to GLBs’ popularity. Rather than transfer out of an old annuity contract into a new one, many policyholders are holding tightly to the more generous GLBs they bought before the market tanked.
While there are a number of reasons why an investor might buy a variable annuity without a GLB—for the tax deferral, maybe; or because a younger investor has the time horizon not to need to shoulder the expense of a GLB for the time being—for most investors, variable annuities are now synonymous with GLBs, which have been popular with risk-averse investors since they were introduced amid the dotcom boom.
But advisors aren’t so sure GLBs’ popularity are enough to keep variable annuity sales afloat.
“Back when they were introduced, baby boomers were saying, ‘I don’t care about my heirs! I’m worried about my income,’” said Mark Thompson, a Raymond James advisor in Melbourne, Fla. “Last year, people were buying them for the same reason. I have yet to have someone buy a VA without a living benefit.”
However, rising costs and stingier benefits are causing Thompson to think twice about recommending variable annuities, with or without GLBs. “These products just aren’t as attractive as they were six months ago,” he said. “I think sales are down in direct correlation to that; it’s hard to recommend them, considering the higher cost, and VAs have declined at my practice as a result.”
GLB riders, which might have cost 50 basis points in the past, now run policyholders anywhere between 85 and 100 basis points, said Jeffrey Oster, an independent advisor in Alameda, Calif.,
Both Oster and Thompson said that they are recommending clients who bought variable annuities with GLBs in the past hold onto them. “I can’t tell you how many accounts I’ve seen with a cash value of $90,000 and an income base of $160,000,” Oster said.
A client using that old annuity to buy a new one would just have the cash value of $90,000 to shop with—a win for the insurer, but not for the client.
For this reason, Thompson said he’s being very careful to keep them within the limits of their contracts in order to preserve those more generous benefits. A single slip up by a client—withdrawing more than an agreed 5%, for example—can void GLBs. Thompson’s practice employs an annuity expert to keep advisors and their clients fully abreast of the small print in each variable annuity contract.
Going forward, though, if pricing doesn’t drop, or if benefits don’t improve, Thompson said he’s heard folk say the VA could go the way of the dodo. He doesn’t believe it will happen—insurers made too money on VAs in happier markets to turn their backs on the product now—but a failure by insurers to more cost-effectively manage risk will mean variable annuities “will never approach the popularity they once had.”
Ultimately, it’s hard to recommend a product, Thompson said, that has fewer features than it did last year, is more complex and more expensive. GLBs may still be variable annuity's best angle, but until their features improve, sales may well continue to fall, he said.