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VAs On The Income Frontier
BY LINDA KOCO
    “The income planning side of variable
annuities is going to be huge,” predicts
Laurence Greenberg, president of Jefferson
National Life, Dallas.
    Long used to help people accumulate
money, VAs will increasingly be used to
provide a monthly income to people who no
longer receive a monthly check from
working, Greenberg maintains.
    People will intentionally buy the VA for
the purpose of annuitization, he predicts.
    Boomers, in particular, will be
experiencing a lot of anxiety as they
approach retirement, he explains. They will
face Social Security issues, new drug plans,
long term care, longevity, rising costs, and
other challenges, he says, and they will be
realizing that “I am spending my money, not
saving. How can I make sure I don’t run out
of money?”
    The VA is one part of the solution, say
many industry executives. It answers the
question, “how do I get paid in retirement?”
says Greenberg. This article reviews how
VA manufacturers are configuring their
products to do that more effectively.
    Design for simplicity and transparency.
VA firms are rushing to find ways to make
the product as simple to understand and use
as possible. That includes transparency, too,
in fees, costs and features.
    “We will see more plain vanilla
products,” predicts Greenberg. They will
have clarity in pricing, but still offer
diversified portfolios so people can keep
growing their assets while in retirement. If
the fees in the products aren’t too high, this
will have strong appeal, he says.
    His own company, a subsidiary of
Inviva, New York City, debuted a low-cost
VA for the accumulation market last June,
but is now looking at applying the same
principals for immediate annuitization. (The
earlier VA, Monument Advisor, has a flat
$20 a month insurance fee. Designed for
distribution by fee-based advisors, it has no
surrender      charges     and      pays    no
commissions.)
    Consumers get very concerned about
handing over a chunk of money to an
insurance company, Greenberg explains.
“This is an issue of control, and a need for
strong consumer value.”
    Therefore, for single premium immediate
annuities, “there needs to be pure
transparent value to the consumer and
advisor,” he says.
    Other VA executives also see simplicity
and transparency as going hand in hand.
“The trend is: more user-friendly, easier for
clients, and no bate and switch,” notes
Robert Scheinerman, senior vice president-
marketing at AIG/SunAmerica Retirement
Markets, Los Angeles. “(We want to be sure
that) you get what you think you got.”
    One example: AIG decided it will not
change fees when a step-up occurs under
terms of its GMWB rider for VAs. “We
think it important that this fee be the same as
at policy issue,” Scheinerman says.
    Over at AXA Equitable, “we explain
exactly how the VA features work and the
costs,” says Steven Mabry, vice president-
annuity development, New York City.
    Simplicity in income products is also
important, Mabry points out. But he
cautions that most products will still have
some complexity. That’s where the advisor
comes in, he says.
    Build for advisor involvement. Advisors
are critical to the successful use of VAs for
income planning, according to Mabry and
most other VA executives.
    They are needed to show clients how the
income features work and how the features
meet client needs, explains Mabry.
    For instance, “who determines what
percent of the clients’ income plan the VA
should occupy?” asks James R. McInnis,
president-annuity distribution, at ING in the
West Chester, Pa. office. The answer is, the
advisor needs to work with the client on
this, he says.
    About 4 or 5 years ago, a number of
producers stopped selling VAs, McInnis
notes. The complaint was, VAs are too
complex and time consuming and they
involve too many regulatory challenges, he
recalls. That exodus from the VA
distribution channel was one reason for
development of simpler products--to bring
the producers back, he says.
    So, the simplicity trend and the presence
of advisors are now closely entwined, right
along with transparency in fees and features.
    VA developers increasingly view the
advisor as key to helping clients develop
income plans and make product choices. If,
say, a client complains that a product’s fees
are too high, “it is up to the producer to
show the client the value,” says McInnis.
    Firms are also looking to advisors to
convey the VA income story.
    The tools advisors have traditionally
used for income planning include asset
allocation and systematic withdrawal,
observes John M. Kawauchi, vice president-
product management at Nationwide
Financial, Columbus, Ohio. “But those tools
can’t guarantee an income for life. Only an
insurance company can guarantee 100% that
people won’t lose their money.”
    Today, companies are relying on
advisors to deliver that message. “The
advisor can direct clients (in how to) to use
the income side of the VA to cover the
portion of their retirement expenses that are
set,” explains Scott M. Schumacher,
associate        vice        president-product
management, Nationwide.
    The advisor’s asset management role is
also important, says Patrick Ferrer, national
sales director at Jefferson National. This
requires developing solutions to help clients
build an income. It also requires that agents
stay involved--with compensation--whether
the client’s income comes from only a VA
or from a blend (VA, tax-free bonds, stocks,
real estate investment trusts, etc.), he says.
    Focus on ‘pensionization.’ Companies
are nudging advisors to create “income
solutions” that serve the same function as
the old traditional defined benefit pensions,
Ferrer explains.
    He calls this the “pensionization” of
client assets, not annuitization.
    Consumers and advisors have generally
not wanted to annuitize, Ferrer explains.
“But they do want some kind of guaranteed
income stream,” he stresses, and, if they do
not have a traditional pension, they need
assistance setting up this stream.
    The pensionization process refers to
finding solutions (using VAs and fixed
annuities among other products) that create
a predictable monthly income.
    At ING, something similar is happening.
“We talk about ‘creating your personal
pension’ or ‘building an income you cannot
outlive,’” points out McInnis.
    The emphasis is on solving the needs of
the customer without attaching the word
annuitization, says Ann Hughes, senior vice
president and head of business development
at ING in the Dallas office. ING also
emphasizes developing solutions that give
people what they want—e.g., flexibility,
access, ability to suspend benefits, etc.—
rather than names of features.
    Refresh annuitization. Even though some
annuity experts don’t like the word
annuitization, it remains a working concept
for income planning. Some developers are
even innovating around this concept. For
instance, Lincoln Financial Group, Hartford,
Conn., has recently enhanced one such
innovation it debuted a few years back. This
is i4LIFEAdvantage, a patented VA rider
that has both withdrawal with annuitization
characteristics.
    The base rider provides clients with an
“access period” during which regular (and
extra) withdrawals are made and during
which liquidation is allowed. This access
period can be shortened or lengthened at
will, but once it ends, the product then
makes payments for life. The product is
being sold to people in their 70s in the high
affluent market who are ready to start
drawing down income, points out Heather
Dzielak, annuity line business leader.
Average account size is $200,000.
    The new enhancement targets a younger
client--the retiring baby boomers. Its helps
clients “see” their income needs 5-15 years
ahead, says Dzielak, noting the purpose it to
help them build towards a future guaranteed
income stream, the amount of which they
know today. This is a minimum guarantee,
she stresses, adding the money stays
invested so “it is a worst case benefit.” The
feature is also revocable, she says, adding
that revocability is important to boomers
who like to maintain control, and to advisors
who may want to move clients into a new
product category later on.
    Provide living benefit guarantees. In VA
circles, living benefit guarantees take center
stage in income planning discussions. In
fact, 85% of VAs sold today offer such
benefits, according to Morningstar research
cited by Mark Phelan, senior vice president-
individual investments at Nationwide
Financial, Columbus.
    Introduced a few years ago, living
benefits features vary considerably. But
most share this element: they ensure that the
policyowner can access certain policy
values, regardless of market performance.
    That’s      important,     says     Robert
Goldenberg,         vice     president-annuity
marketing and product development at AXA
Equitable, because the guarantees free
people to invest more in the market than
they otherwise might. Many older people
will find that particularly valuable, because
they need to make up for market losses
experienced in the early 2000s, he says.
    The guarantees also help people plan for
other retirement-related risks, such as
longevity and interest rate change,
Goldenberg says. “We, the insurance
company, manage these risks on behalf of
the client, who can’t.”
    For income planning, 2 living benefit
structures stand out: the guaranteed
minimum withdrawal benefit for life, and
the guaranteed minimum income benefit.
    Develop GMWB for life options. This is
a for-cost option that guarantees the owner
can receive a minimum monthly amount for
life—as withdrawals, not annuitized
payouts. The remaining VA account value
continues to grow tax deferred. (If
withdrawals beyond the minimum are made,
the monthly withdrawal is adjusted
accordingly.)
    This is for clients who want income now
and who think they may need it for their
entire lifetimes, says Hughes of ING, which
offers the LifePay GMWB.
    The advantage, she says, is that, for 50
basis points, the client gets immediacy (the
income starts right away), flexibility (the
client can start and stop withdrawals, at
will), and no lock-up of assets (the client
doesn’t have to annuitize to get income).
    It’s for clients who want income they
can’t outlive, want to have it now, and want
to continue to control the assets, Hughes
continues, noting that’s an especially strong
play for baby boomers, who often look for
an income stream right now.
    GMWB for Life is a good alternative for
someone who may want and need to
annuitize but who is not yet ready to give up
control of the assets, adds Schumacher of
Nationwide, which is debuting its first such
option. (Called L-inc, the option guarantees
withdrawals for life of the owner—and
spouse, if the spousal option is added--of up
to 7% of the income base.)
    These features give clients real choice,
he stresses. The GMWB for life provides
more asset control than annuitization and a
monthly income that’s guaranteed, he
explains, while traditional annuitization
provides a higher monthly income than
under GMWB for life but no asset control.
    It also has advantages for advisors—they
get compensation on the assets remaining in
the VA, and they can still advise on moving
the money around, Schumacher says.
    GMWB for life will be a “bridge to
annuitization,” he predicts. Over time,
people will get used to that monthly income
flow, he explains. “Then, to maximize the
income value, they’ll choose to annuitize.”
    Phoenix Companies, Hartford, Conn., is
so convinced of the value of GMWBs to
consumers that it has developed a full
GMWB suite. It has 2 traditional GMWB
riders (paying 5.25% and 7.35%,
respectively, of initial premium a year, with
a minimum cumulative benefit of 105% of
initial premium); the Lifetime GMWB, and
the Lifetime GMWB for 2 (extends the
GMAB to the surviving spouse).
    Why such an extensive commitment?
GMWBs have features boomers will need in
retirement, contends Timothy Paris, vice
president and actuary-annuity product
development at Phoenix.
    “Defined benefit protections are eroding,
and most boomers are concerned with
maintaining their standard of living as well
as having peace of mind,” he explains.
    Moreover, the features enable advisors to
meet consumer demand, and to be
compensated for it via trailers on the VA.
    The features Paris sees as most appealing
to clients are: flexibility; the ability to stay
invested; discretion on choosing when to
take income; guaranteed income for life (via
lifetime riders), and liquidity while taking
income.
    Furthermore, says Paris, like equity
index annuities, GMWBs offer upside
potential (via the VA subaccounts) with
downside protection (via the guaranteed
income stream). And, with the spousal rider
added, it provides retirement security for
both spouses, he says.
    Develop GMIB options. The guaranteed
minimum income benefit is the other living
benefit that income planners use. The GMIB
guarantees what the minimum amount of
monthly income will be, once the
policyholder annuitizes the contract.
    At AXA Equitable, 80% of new VAs
have the GMIB attached, reports Mabry.
The cost is 65 bps, but that apparently is not
a deterrent.
    The feature targets the at-retirement
person who has a significant amount of
assets that he or she wants to guarantee,
Mabry explains, noting that the average
ticket is $100,000. “People still remember
the last 2 market corrections,” he notes.
“They want to be sure they won’t take a
dramatic loss if another correction occurs
when they are retired.”
    AXA Equitable also offers a GMWB,
and it plans to add a GMWB for life in May
2006, points out Goldenberg. Still, the
insurer sees the GMIB as having very strong
appeal and supporting greater use of
annuitization.
    Annuitization is still a tough sell, allows
Drew A. Denning, 2nd vice president-
retirement income management at Principal
in Des Moines, Iowa. “But if interest rates
rise dramatically, say to 8%-8.5%, we’ll see
a stronger lift on the income annuity side.”
The higher payouts will mitigate concerns
about liquidity options, he predicts.
    Increase innovation. VA providers need
to continue innovating “to directly or
indirectly support retirement security,”
maintains Paris, of Phoenix Companies. An
increasing number of developers feel the
same. Here are ideas currently in motion:
    • Provide caregiver benefits. Principal
already offers a “caregiver income benefit”
on the fixed annuity in its Principal Income
IRA, says Denning. This feature increases
the monthly payout if caregiving triggers are
met. The benefit is not yet in Principal VAs,
but he says it’s an area to explore because
“life events are real issues; people need the
liquidity to pay for them.”
    • Offer lifestyle funds. Using these,
whether for income or withdrawal benefits,
is on the rise, says McInnis of ING. The
insurer offers such funds in conjunction with
asset allocation.
    • Tweak asset allocation. When income
planning clients choose the GMWB for life
option, most VAs require the client to invest
in one of 4 or 5 asset allocation models.
Now, Phoenix is expanding its model
options to 9. (The 4 new models use a fund-
of-funds approach, investing only in
exchange traded funds.) VA owners who
want Phoenix’s GMWB rider must choose
one of those options, says Paris. But now
they have more choice.
    • Reduce investment restrictions tied to
the GMWB. ING says owners can choose
their own investment options, as long as
20% of the money is invested in the
designated       fixed     allocation    fund.
Meanwhile, both AIG/SunAmerica and
Nationwide have decided not to restrict a
GMWB client’s investments with an
allocation requirement.
    “It’s too risky” to lock in a customer’s
investment options with restrictions,
explains AIG’s Scheinerman, noting this can
limit exposure to equities, he says. Besides,
“baby boomers are all about choice and
investment flexibility,” he says. With no
restrictions, the advisor is free to work with
the client on investment selection in view of
the overall portfolio.
    • Allow conversions. 401(k) plan
sponsors could add a VA option to their
plans that ties asset allocation to a GMAB
(guaranteed minimum accumulation benefit)
with rollups, says Denning. This GMAB
would be in place during the working years.
Then, 5 years before a participant retires, a
conversion feature could kick in, turning the
GMAB into a GMWB for the retirement
phase of life. “That would be like a lifetime
fund with a guaranteed floor,” he says,
noting that Principal is “aggressively
researching this.”
    • Permit quarterly lock-in on GMWB
account value. ING’s new LifePay living
benefit lets the annuity owner lock in
increases in the account value once every
quarter before withdrawals begin; then, after
income starts, the owner can “reset” the
guaranteed income amount annually.
     • Offer auto step-ups. AIG/SunAmerica
and John Hancock, Boston, say their
GMWB step-ups (lock-ins of market gains)
occur automatically. Some step-ups require
owners to take action to elect the stepped up
value, notes AIG’s Scheinerman, “but we
are uncomfortable with the possibility that
you could miss the step-up if you failed to
call.”
     • Redesign advisor compensation. For
VA annuitization and variable immediate
annuities to develop, producers will need to
receive trailer compensation on the money
under management, maintains Schumacher
of Nationwide. “It’s got to come,” he says.
Maybe there will be some sort of commuted
value on the trailers, he suggests, so brokers
could receive, say, 2% up-front and then 25
basis point trailers.
      “We need to find ways to pay the
advisor for the income planning,” agrees
Denning of Principal. But trailers, if based
on account value, will keep going down as
the client continues to draw down assets, he
points out. So, the new designs may allow
the agent to take the compensation either
up-front or over time (in which case it will
be in declining amounts), he says.
     Push education. Advisor and client
education is essential to furthering the use of
VAs for income planning, say virtually all
VA executives. Some firms are making this
a priority.
     For instance, AXA Equitable requires
advisors to pass a 90-miniute certification
course before they can sell its Retirement
Income for Life product, says Goldenberg.
“If the product is upgraded, they will have to
be recertified, too,” he says. The company
has also developed a nonprofit website—
www.variableannuityfacts.org—to provide
public education on VAs, including the
income aspects.
     Meanwhile, Phoenix is offering its
advisors a presentation on its living benefits
suite. It discusses the features, where they
fit, case studies, and so on, says Parris.
     • Factor in health care costs. The use of
nursing home riders and increased liquidity
are tied together, says Greg B. Salsbury,
executive vice president, Jackson National
Life Distributors, Denver. They reflect the
growing concern about funding health care
costs in retirement. Subaccounts that allow
for health care indices might therefore be of
interest to advisors.
    Ultimately, using VAs for income
planning will require the industry to come
back to focusing on the performance of the
overall chassis, predicts Salsbury.
    The product should not be just an
overpriced fixed annuity, he says. The cost
structure needs to be lower, he continues,
explaining this “will allow for greater
income to the client” and also higher
performance and greater transparency, too.
    Advisors are really intrigued with
income planning, adds Dzielak. They see it
as an opportunity to grow their business and
to retain existing clients, who will
increasingly need this expertise. “It’s a huge
opportunity.” Not taking advantage of it is
also huge—a huge risk, she says.



PULLQUOTE I

 The industry is positioning the variable annuity as one part of
                 the retirement income solution
PULLQUOTE II

The trend is: more user-friendly, easier for clients, and no bate
                          and switch
VA Income Strategies
    When Does The Client Want To Draw Income?

When          Some Options To Consider

Now:          • VA with a guaranteed minimum withdrawal benefit
              • Annuitize the VA
              • Purchase an income annuity, variable or fixed

Later:       • Purchase a deferred VA, standalone or as an option in a group annuity
             • Purchase a deferred VA with a Guaranteed Minimum Accumulation Benefit
             • Purchase a deferred VA with a Guaranteed Minimum Income Benefit
Note: If you want to take out the innovations from the article, then here they are in a sidebar. It
doesn’t look like it will read well this way, but it’s your call.

If you break it out, please:
     1) Add a (See sidebar) to the end of the Innovation paragraph, to reference the innovation
         box.
                                                  rd
     2) Near the very end of the story, in the 3 paragraph from the end beginning with
         “Ultimately…”, fill out the Salsbury ID. (You’ll find the full Salsbury ID at the end of the
         yellow section that you have removed).

Call me if you have questions on any of this. LK

Innovation For Income
    Ideas For Reshaping VAs
       Provide caregiver benefits. Principal already offers a “caregiver income benefit” on the fixed
                                                                        nd
        annuity in its Principal Income IRA, says Drew A. Denning, 2 vice president-retirement income
        management at Principal, Des Moines, Iowa. This feature increases the monthly payout if
        caregiving triggers are met. The benefit is not yet in Principal VAs, but he says it’s an area to
        explore because “life events are real issues; people need the liquidity to pay for them.”
       Offer lifestyle funds. Using these, whether for income or withdrawal benefits, is on the rise, says
        James R. McInnis, president-annuity distribution, ING, West Chester, Pa office. The insurer offers
        such funds in conjunction with asset allocation.
       Tweak asset allocation. When income planning clients choose the GMWB for life option, most VAs
        require the client to invest in one of 4 or 5 asset allocation models. Now, Phoenix is expanding its
        model options to 9. (The 4 new models use a fund-of-funds approach, investing only in exchange
        traded funds.) VA owners who want Phoenix’s GMWB rider must choose one of those options,
        says Timothy Paris, vice president and actuary-annuity product development. But now they have
        more choice.
       Reduce investment restrictions tied to the GMWB. ING says owners can choose their own
        investment options, as long as 20% of the money is invested in the designated fixed allocation
        fund. Meanwhile, both AIG/SunAmerica and Nationwide have decided not to restrict a GMWB
        client’s investments with an allocation requirement. “It’s too risky” to lock in a customer’s
        investment options with restrictions, explains AIG’s Robert Scheinerman, senior vice president-
        marketing, Los Angeles. This can limit exposure to equities, he says. Besides, “baby boomers are
        all about choice and investment flexibility.” With no restrictions, the advisor is free to work with the
        client on investment selection in view of the overall portfolio.
       Allow conversions. 401(k) plan sponsors could add a VA option to their plans that ties asset
        allocation to a GMAB (guaranteed minimum accumulation benefit) with rollups, says Denning. This
        GMAB would be in place during the working years. Then, 5 years before a participant retires, a
        conversion feature could kick in, turning the GMAB into a GMWB for the retirement phase of life.
        “That would be like a lifetime fund with a guaranteed floor,” he says, noting that Principal is
        “aggressively researching this.”
       Permit quarterly lock-in on GMWB account value. ING’s new LifePay living benefit lets the annuity
        owner lock in increases in the account value once every quarter before withdrawals begin; then,
        after income starts, the owner can “reset” the guaranteed income amount annually.
       Offer auto step-ups. AIG/SunAmerica and John Hancock, Boston, say their GMWB step-ups (lock-
        ins of market gains) occur automatically. Some step-ups require owners to take action to elect the
        stepped up value, notes AIG’s Scheinerman, “but we are uncomfortable with the possibility that
        you could miss the step-up if you failed to call.
       ”Redesign advisor compensation. For VA annuitization and variable immediate annuities to
        develop, producers will need to receive trailer compensation on the money under management,
        maintains Scott M. Schumacher, associate vice president-product management, Nationwide
        Financial, Columbus, Ohio. “It’s got to come,” he says. Maybe there will be some sort of commuted
        value on the trailers, he suggests, so brokers could receive, say, 2% up-front and then 25 basis
    point trailers. “We need to find ways to pay the advisor for the income planning,” agrees Denning
    of Principal. But trailers, if based on account value, will keep going down as the client continues to
    draw down assets, he points out. So, the new designs may allow the agent to take the
    compensation either up-front or over time (in which case it will be in declining amounts), he says.
   Push education. Advisor and client education is essential to furthering the use of VAs for income
    planning, say virtually all VA executives. Some firms are making this a priority. For instance, AXA
    Equitable requires advisors to pass a 90-miniute certification course before they can sell its
    Retirement Income for Life product, says Robert Goldenberg, vice president-annuity marketing and
    product development, New York City. “If the product is upgraded, they will have to be recertified,
    too,” he says. The company has also developed a nonprofit website—
    www.variableannuityfacts.org—to provide public education on VAs, including the income aspects.
    Meanwhile, Phoenix is offering its advisors a presentation on its living benefits suite. It discusses
    the features, where they fit, case studies, and so on, says Parris.
   Factor in health care costs. The use of nursing home riders and increased liquidity are tied
    together, says Greg B. Salsbury, executive vice president, Jackson National Life Distributors,
    Denver. They reflect the growing concern about funding health care costs in retirement.
    Subaccounts that allow for health care indices might therefore be of interest to advisors.

				
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