An Indexed Annuity GLWB is Not…
November 21, 2010 by Sheryl J. Moore
By Sheryl Moore
Nov. 18, 2010 — Recently, a field marketing organization (FMO) published an article on indexed annuity Guaranteed Lifetime Withdrawal Benefits (GLWBs) that raised a few industry folks’ hackles.
While it was an interesting recruiting attempt and a couple of the issues in this article were valid — the author still has a lot to learn about the benefit that I brought into this market more than four years ago. Here, I provide a quick refresher for those wanting to know more. An indexed annuity GLWB is not:
A Good Choice for a Client Without a Need for Income
While the rollup on a GLWB may provide a compelling story now that rates are in the dumps, it is not an excuse to sell income on a legacy sale. Keep in mind that a vast majority of annuity contracts are passed onto clients’ heirs, without money ever being withdrawn. If clients have no intention of ever taking income out of their contract, selling an income feature that will cost them money does not result in a suitable sale.
A Way to Obtain Principal Protection
Yes, GLWBs were first introduced to the variable annuity (VA) market to provide principal protection on a risk money product. However, indexed annuities (IAs) already have a principal protection feature; just like fixed annuities. The reason I brought GLWBs into the indexed annuity market was to provide an alternative to annuitization, not for principal protection purposes.
In 2005, everyone was discussing the trillions of dollars that baby boomers needed to move from an accumulation stage to a retirement income stage. Yet, I couldn’t coerce the independent agent distribution to tell that story. Would you? Income annuities (such as SPIAs or annuitized contracts) eliminate the agent and client’s control over the assets. If the client wants to start/stop income, or change their income amount — tough. The client is stuck with the payment they get and there is nothing anyone can do about it (short of selling the contract to those goofballs with the “It’s my money and I want it now!” commercials). This is why many refer to income annuities or annuitization as “annuicide.”
To compound the problem, agents are paid 4 percent commission at best on an income annuity sale. Would you sell something that paid less and didn’t allow for flexibility? Enough said. Indexed annuities with GLWBs give the agent the chance to tell the income story and still receive their average 6.35 percent commission.
The Only Way to Get Income You Cannot Outlive
That being said, a GLWB is not the only way to obtain an income stream that cannot be outlived. Annuitizing a deferred annuity or purchasing a single premium immediate annuity (SPIA) also provides this option. Notwithstanding, it should also be noted that only 2 percent of clients annuitize their contracts (no doubt that a lack of flexibility has had an impact on this statistic).
The Best Choice if You Want the Greatest Payout
Understanding that there are options for guaranteed lifetime income that you cannot outlive, you should know that an income annuity will always provide a greater payout than a GLWB on a fixed or indexed annuity. I know many of you are protesting now, insisting that the rollup on the GLWB has to contribute to a higher payout, right? Wrong. With GLWBs, you are paying for flexibility, something you do not have in an income annuity. For that reason, even a life and 20-year certain payout on an income annuity is more competitive than the annual income on any IA GLWB.
A Guaranteed Minimum Return
The rollup (or accumulation benefit) on the GLWB is not comparable to a guaranteed minimum return on the contract. It should never be sold as such, but it rarely ever has been. Our research with consumers has shown that despite the fact that agents are usually clear and accurate in their communication about GLWBs, what the client takes away from the conversation is altogether different than what was communicated to them. Annuities are complex products, folks. You add a GLWB to that conversation and the client’s eyes start to glaze over. What the client does is listen to what the agent says, and relates it to something they are familiar with (a method we all use for cognition of unfamiliar topics). Usually, they compare what they are hearing to the return on a certificate of deposit (CD) or savings account.
What the agent says: “This annuity features a guaranteed lifetime withdrawal benefit with a guaranteed increase of X percent every year. Now, this benefit provides a higher value to your annuity, which you cannot obtain if you cash-out your annuity, but provides a much greater value to calculate the payments that your lifetime income is based upon.”
What the client hears: “This annuity features a guarantee of X percent every year.”
So, be careful not to damn the feature or damn the agent. While the client bears the responsibility for what they purchase, it is still the agent’s job to ensure that they understand what they are purchasing. Tips: compare and contrast the account value of the contract and the GLWB’s benefit base value, ask if the client understands, provide plenty of disclosures, and document, document, document.
The Same on Every Product
Every GLWB is different. Some offer rollups with simple interest, when most pay compound interest on their rollups (and no, double-digit simple interest is not always greater than single-digit compound interest). Some GLWBs do not have an explicit cost where others charge as much as 0.95 percent annually. Some have a charge that is calculated on the benefit base value of the GLWB, where a few have charges that are calculated on the lower account value of the contract (remember, charges based on the benefit base always cost more because the Benefit Base is always higher). Some have bonuses on the benefit base value, where most do not. Some have greater withdrawal percentages than others. It is so very important to understand all of the features of the GLWB that you are contemplating selling. (Hint: Make sure you are working with an FMO that understands these features, too. If they think it takes a 15 percent gain on the account value to equal an 8 percent rollup on the GLWB — keep looking! It only takes an 8 percent gain on the account value, plus the cost of the GLWB, to be equivalent to an 8 percent rollup on the GLWB.)
Elected on 100 Percent of all Indexed Annuity Sales
GLWBs are right for some clients, not all. This is evident when looking at what percentage of clients elect the benefit on their indexed annuities. Looking at second quarter indexed annuity sales, 56.6 percent of indexed annuities that have a GLWB have clients that have elected the benefit, according to AnnuitySpecs.com’s Sales and Market Report for the second quarter of this year. That is nearly $5 billion in assets that provide flexibility AND the option for guaranteed income that the purchaser cannot outlive — in just one quarter! What’s more, an average of 6.8 percent of the clients that have elected a GLWB on their IA have already turned on their guaranteed lifetime income, almost 5 percent greater than the percentage of clients that annuitize! Looks like we solved that retirement income problem.
Sheryl Moore is President and CEO of AnnuitySpecs.com, an indexed product resource in Des Moines. She has over a decade of experience working with indexed products, and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at email@example.com.
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