The lessons of the past decade are more complicated than this article, and I’ll attempt to both aggregate a series of variable annuity articles and comment upon the financials.
In my opinion, the core problem is that variable annuities are no longer sold as a variable annuity, and in fact they shouldn’t be. A variable annuity assumes the investor invests in a series of mutual funds–wrapped by an annuity–to provide long term retirement savings.
These products offer investors several key benefits—tax-deferred compounding, a minimum death benefit, and the potential for life-time income. Fairly important benefits for long-term retirement savings.
However, two things things have occurred over the past decade plus. First, life-time income riders have been added. These riders offer guaranteed life-time incomes, which are very attractive, however the life company is basing these long-term contractual guarantees on a volatile asset–equities.
Life companies have raised the guarantees to compete and this has resulted in both substantial risk to the life company and real losses in some cases. Multiple high profile companies have either retreated from the business, or have simply reduced sales.
The second part of the experience has been the poor equity market performance over the past eleven years. Dismal would be a good adjective. Life companies write variable annuities assuming a long-term positive performance of a blend of stocks, bonds and cash. Today, bond yields and cash yields are at historic lows. Thus the variable annuity company cannot receive it’s predicted returns to pay guarantees. The stock market performance means that most products are well below pricing.
This is from the insurers point of view. From the policy-holders point of view it is equally dismal. Fees have escalated to ridiculous levels. The three top selling variable annuity companies all have fees that prevent the investor from making a reasonable return. The cost of the guarantees, the money management and the insurance fees are simply too great to allow investors to earn a reasonable rate of return relative to the risk of stocks and bonds.
By my math, if an investor has chosen one of the many riders available, the likely fees in many of these products could exceed 4%. If you assume that stocks average around 9% over long periods of time and bonds are currently around 4% or lower, and further you own a blend of both, then your gross return before fees is likely around 7.5%. After fees you may be at 3%–or slightly higher or lower.
In short, these products have allowed fees to price themselves out of the market for a reasonable person.
It’s a terrible situation when neither an investor nor the insurer can make money on a product. The time for these products has either come to an end, or they need to be substantially redesigned.
The Chief Executive Officers of MetLife, Prudential Insurance, and Jackson National Life should ask themselves whether they have recommended the purchase of their products for their parents–or even if they have purchased substantial policies–at full fees–for themselves. If the answer is no, then they have already given their verdict on the products they underwrite.
After years in the variable annuity market, Genworth Financial Inc. is pulling out of the business.
Genworth’s decision is part of a trend of many insurance companies dropping their variable annuity products in favor of other types of business. Many companies are shying away from these products as interest rates remain low.
Before the Great Recession, life insurance firms competed to offer more generous payouts for their variable annuities. Since these financial products typically offer a base amount of money to its purchasers each month, with the possibility of earning more, an insurance company must make enough off its initial investment to at least cover this base level of income for its investors.
Unfortunately for companies offering these types of retirement investments, these base payments have become a difficult obligation to meet. As interest rates have gone down, many of these plans are now losing money for insurance companies, many of whom are predicting having trouble making these promised payments. While there have been no reports of consumers not reciving their promised payouts, this projected trouble in the industry is making many retirement-age consumers wary of purchasing this type of product.
Genworth was in the top 20 companies which sold variable annuities in 2008. It has since seen a decrease in sales directly related to the flagging popularity of their annuity products. The company, along with many others in the industry, attempted to redesign their variable annuity offerings, making them less generous to investors but more profitable to the companies offering them. Sales of variable annuities have fallen to about $102.8 billion during the first nine months of 2010, down from $155.6 billion for all of 2008.
Fortunately for investors looking at where to place their retirement savings, a variety of other options exists outside of these products. Genworth notified distributers on Thursday that it would refocus its business on life insurance, long-term-care insurance and other types of retirement-income products.
- More On Variable Annuities Explained (business.ezinemark.com)
- 7 Essential Characteristics Of Variable Annuities That You Should … (iphoneinsurance-uk.org.uk)
- Genworth stops sales of 2 annuities, 100 jobs cut | Washington … (washingtonexaminer.com)
- The Best Variable Annuities (wealthvest.com)
- Genworth Discontinues Sales of Retail Variable and Group Variable Annuities (phx.corporate-ir.net)
- Genworth Drops Variable Annuities – Distribution – Life and Health … (lifeandhealthinsurancenews.com)