Variable and Index Products: A Market of Growth
January 9, 2010 by Christina Pellett
In today’s insurance industry, agents may often offer clients and prospects products that are nearly identical to their competitors’. In the wake of this situation, industry players have begun to focus on products that offer guarantees and add-ons that lend more value to products consumers cannot find just anywhere.
That’s where variable and index products, both on the annuity and the life side, come in.
According to Marian Sole, senior vice president of life sales for AXA Partners, “(Variable products) really give the best upside risk and downside protection for the customer. When you think of the number of baby boomers retiring, they need income. They have no pension, none of the defined benefit plans they once thought they’d have. You need to meet the guarantees and meet accumulation, and variable products are the perfect market for that.”
Ray Trueblood, vice president of life insurance strategy for Jackson National Life Distributors LLC, says that variable and index life products in particular “are leading the sales of life insurance for an industry that’s fairly flat. You can illustrate better returns with both variable and index products and, quite frankly, they look better than fixed products.”
When searching for prospects and new sales for this market, says Sole, agents should pay attention to boomers, who, as a whole, are looking for accumulation options. This demographic, she says, comprises consumers who still need financial protection but are also looking for upside and flexibility.
“It’s time to get back into this market,” Sole says. “People began veering away from variable products in 2002. Now, it’s time to start looking at them again — it’s time to get into the market when everybody else is not. Producers don’t want to be hassled with the cost and time involved with compliance, but it’s really in the best interest of the customer to handle these products.”
Variable annuities » According to a Dec. 3, 2007 report from LIMRA International, variable annuity sales jumped 23 percent in the third quarter of 2007, reaching $46.4 billion.
“Variable annuity sales are near certain to come in at record levels for 2007, and while fixed annuity sales will likely be down for the year, we anticipate strong fourth quarter sales growth,” says Dan Beatrice, analyst for LIMRA’s annuity research.
One element that has contributed to the rise of variable annuities is the protection features that allow investors to stay the course of longtime retirement investment strategies, says Bob O’Donnell, senior vice president of product development for Prudential’s annuities division.
“The biggest change is a continued increased demand for valuable protection features for investing,” O’Donnell says. “Living benefits and income guarantees give consumers the right to control assets … It’s the only market meeting the needs that are being identified as the single big concerns of retiring Americans today: a fear of outliving their assets or becoming a burden on their families.”
The mass shift of baby boomers into their retirement years, says John Carter, president of Nationwide Financial Distributors Inc., will likely continue to drive up variable annuity sales.
“As millions of boomers transition into retirement, we’ll continue to see demand for principal protection, lifetime income, flexibility, and growth potential … all guaranteed,” Carter says.
Variable life » A type of cash-value insurance policy, variable universal life (VUL) offers a death benefit, as with any life insurance policy. And, much like whole life insurance, the insurance policy has a cash value that enjoys tax-deferred growth over time and allows clients to borrow against it.
Unlike either term or traditional whole life insurance, however, VUL policies allow the insured to choose how the premiums are invested. This means that the policy’s cash value, as well as the death benefit, can fluctuate with the performance of the investments that the policyholder chose.
Recent research by LIMRA indicated a rise in both variable and variable universal life sales, which were up 9 percent and 10 percent, respectively. With the exception of whole life, all life products were up — especially variable universal life, which was up 19 percent for the year and 110 percent for the quarter.
According to Trueblood, “This market is growing. We’re having phenomenal success with variable life with the new features that keep coming in in terms of guarantees, overloan protection riders, and minimum guarantees for withdrawals … Variable and index life products are leading the sales of life insurance for an industry that’s fairly flat.”
And Mark Hug, chief marketing officer for individual life insurance at Prudential, says, “Variable universal life has undergone somewhat of a rollercoaster ride since the late ’90s. With the market correction in 2000, we saw a huge dip in variable sales, and those sales have yet to recover.”
As for the future of variable life insurance, “Ironically, you’ll find that it will be similar to what you saw in the annuity market over the last five years,” Hug says. “You’re going to find more features being added to variable life so we can solve individual needs, and the features will be a little complex as they’re going to be tied to guarantees such as variable death benefits, guaranteed withdrawal benefits, and guaranteed income benefits.”
This shift may result in even more complex products, making it essential for agents to become educated and stay current with FINRA’s rules and suitability guidelines.
Index annuities » Introduced in 1995, fixed index annuities (previously known as equity index annuities) have begun running into distribution challenges since the release of FINRA’s legendary Notice to Members 05-50, which indicated that broker-dealers, at their discretion, can dictate which index products their registered representatives can sell.
According to Carter, FIA sales actually declined 3.8 percent in the third quarter of 2007 as compared with the previous year. Agents, however, should not shy away from offering these products, which can be great solutions for specific clients.
“These products serve the needs of cautious, income-minded retirees who are aware of inflation risk and seek the opportunity to achieve a higher upside potential without risking downside protection,” Carter says. “Agents need to look for index annuity products that are simple, transparent, and provide real customer value.”
As for the future of this market, suitability will continue to be a major focus, says Sheryl Moore, president and CEO of Advantage Group Associates Inc.
“Agents should be prepared for new forms, marketing materials, and reductions in issue ages on the products they are used to selling,” she said. “Products that are not in compliance may even be pulled off the shelves.”
Index life » As for the life side of the index product market, new carriers continue to enter the scene. To date, 32 companies offer index universal life, whereas in 2005, only 12 carriers offered this product.
In fact, Moore says that since ’05, she’s seen as many as three carriers in one month adopt the increasingly popular product.
Currently, says Moore, universal life products overall account for 10 percent of the market share — a figure that shows index universal sales are poised to increase.
“Agents are constantly given new choices of carriers to sell with, as well as new product innovations,” says Moore. “Some of the larger carriers in the life market that have hesitated about entering the index life market will slowly begin entering it, lending additional credibility to the product line.”
The market outlook » As the variable and index product markets continue to increase in size and carriers and distributors continue to introduce new products and educate agents so they can help clients decipher some of the complexity, there are some patterns that experts say agents can help with.
In particular, the regulatory environment, which continues to impact fixed index annuities as well as index life products, is worth paying attention to.
“Prepare for the fact that the SEC will rule on index products, so have your credentials in place,” says Sole.
Carter indicates that more flexible, simple, and affordable products are on the horizon, with living benefits and other features becoming more popular among both agents and clients.
Carter does caution agents to be prepared for the potential commoditization of index annuities, which may result in less differentiation between providers. With that in mind, however, agents will likely see a spike in these products as more boomers move into their retirement years.
“Moving forward,” he says, “there’ll most likely be a development around the features to address the rising health care costs of retirees.”
Christina Pellett is managing editor of the Agent’s Sales Journal. She can be reached at 800-933-9449 ext. 226 or ASJeditor@AgentsSalesJournal.com.