'Tis a gift to be simple: complex annuities scare off both buyers and advisers, so the industry is offering less intimidating products.Key Points * Due to their higher expense and complexity, annuities often receive bad press. * Confident that annuities can help baby boomers See generation X. , insurers are experimenting with simpler designs and greater transparency. * Part of the reason for this effort is to sell to the less affluent, who need both growth and protection of assets as they near retirement. A top insurance executive recently spoke about "the elevator elevator, in machinery elevator, in machinery, device for transporting people or goods from one level to another. The term is applied to the enclosed structures as well as the open platforms used to provide vertical transportation in buildings, large ships, test." If he can't explain a variable annuity Variable Annuity An insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio. to someone before the end of the ride, he's not doing a good job. The characterization by Christopher "Kip kip 1 n. pl. kip See Table at currency. [Thai.] kip 2 n. 1. " Condron, Axa Equitable chairman and chief executive officer, sums up the marketing challenge faced by variable annuity manufacturers. They have products that can do what no other financial products can, but their complexity scares off distributors and consumers. Variable annuities Variable annuities Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio. have long offered tax deferral tax deferral The delay of a tax liability until a future date. For example, an IRA may result in a tax deferral on the amount contributed to the IRA and on any income earned on funds in the IRA until withdrawals are made. , investment convenience through a range of investment options, death benefits, and the option of converting to a kind of personal pension plan. Since 2002, they have added risk-management tools to ultimately prevent investment loss and to guarantee withdrawals for life regardless of investment performance. They are likely to attract people who appreciate diversification, asset allocation Asset Allocation The process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. and rebalancing Rebalancing The process of realigning the weightings of one's portfolio of assets. Notes: For example, if your portfolio's proportion of stock has grown too large for your intended assets weightings and risk tolerance, you might rebalance by selling some stock and putting , and portfolio optimization. They also appeal because sales profits taken within a contract need not be reported to the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. . The effects of recent tax-law changes, which would expire if Congress does not renew them, may cause people to be less keen about variable annuities, but those nearing retirement may find great value in the new risk-management tools. The hard reality, however, is that most people don't appreciate or understand these things "These Things" is an EP by She Wants Revenge, released in 2005 by Perfect Kiss, a subsidiary of Geffen Records. Music Video The music video stars Shirley Manson, lead singer of the band Garbage. Track Listing 1. "These Things [Radio Edit]" - 3:17 2. , much less have interest in them. It is a reality that insurers and distributors are working to overcome. Features by Default One way is to make variable annuities simpler. In August, for example, ING Life Insurance and Annuity Co. introduced a product named Simplicity to serve as an alternative to its Golden Select product set, which offers a full menu of options. Rather than requiring buyers to choose the benefits they want, Simplicity serves up a death benefit and minimum accumulation benefit that roll up at 1.5% a year for 10 years. And there are only five investment options, four of which are asset-allocation funds. Distribution partners and subsequent focus groups all told ING they wanted this type of simple product, said Ann Hughes, senior vice president in business development. Many said a simple product would help them increase the number of financial advisers selling annuities in their firms. That matched ING's goals of attracting more advisers to write annuities, "to move some of the cash we know is sitting on the sidelines On the sidelines An investor who decides not to invest due to market uncertainty. on the sidelines Of or relating to investors who, having assessed the market, have decided to avoid committing their funds. ," and to provide a product that while simple, would still help people accumulate money over the long term, said Hughes. As of February, ING had seen what Hughes called a record number of product kits being ordered. "We're really the first carrier to come up with a more simplistic sim·plism n. The tendency to oversimplify an issue or a problem by ignoring complexities or complications. [French simplisme, from simple, simple, from Old French; see simple or transparent VA," Hughes said. "Our target is non-annuity financial advisers, so there's a bit of a learning curve involved and a bit of lead time to show them the product and get them comfortable with writing annuities. But interest has been very high, and we believe sales will follow." Still, this simple annuity required a 56-page prospectus. Lower Costs, Higher Transparency Fidelity Investments Fidelity Investments is a group of privately held companies in the financial services industry. It is made up by two independent but closely cooperating companies, Fidelity Management and Research Corporation (FMR Co. Life Insurance Co. introduced two variable annuities last year, the Fidelity Personal Retirement Annuity and the Fidelity Freedom Lifetime Income Annuity. They don't directly compete with ING's Simplicity. "In client needs and financial-adviser needs, and in providing more transparent, easier-to-understand products, they would be in that pool," Hughes said. "But their distribution model and product design are quite different. So I see them playing in that space, but not a core competitor." A big difference is that the Fidelity products do not offer any living benefits except annuitization. But the products are easy to understand. Online visitors who are motivated can easily learn about the key features of the products, the many investment options, and even whether they ought to consider buying the products. And since the products are bought directly from the company, the mortality and expense fees are low, and there is no surrender charge Surrender Charge A fee levied on a life insurance policyholder upon cancellation of his or her life insurance policy. The fee is used to cover the costs of keeping the insurance policy on the insurance provider's books. . If the 37 investment options are too much, Fidelity suggests choosing a single "Freedom" fund based on a projected retirement year. The fund automatically reallocates investments as the investor nears retirement. The Lifetime Income Annuity offers three Freedom funds, appropriate for people born in the 1930s, 1940s or 1950s, and a money market portfolio. The benchmark rate of return is set at 3.5%, meaning that the variable payouts will increase with portfolio returns in excess of that amount, and decrease with poorer returns. Even though this is a payout product, it offers annuitants access to their assets through up to two withdrawals per year. Jefferson National Life Insurance Co. last year entered the low-cost competition with Monument Advisor, a deferred variable annuity intended for sale through fee-based advisers. The more invested in the product, the more attractive it should be to investors. That's because it has no mortality and expense fee, but instead charges a flat $20 a month, the annual equivalent of 0.24% on $100,000 and only 0.12% on $200,000.The only other charges are fund management fees ranging from 0.26% to 2.54%. Working Through Advisers Simple products can have a place in the marketplace if they have the features clients want, said Steve Kleuver, senior vice president for product and investment management at Jackson National Life Jackson National Life Insurance is a U.S. life assurance company that is a subsidiary of the UK based insurer, Prudential Plc. Founded in 1961, Jackson is headquartered in Lansing, Michigan, and has over a thousand employees in the region. Insurance Co. "But we've taken a very different approach," he said. That approach is to allow buyers, through their financial advisers, to add features onto a low-cost base product. The company's flagship variable annuity, Perspective II, charges a 1.25% mortality-and-expense fee for a standard return-of-premium death benefit. At an additional expense, investors can choose one of five enhanced death benefits, one of several guaranteed minimum withdrawal benefits, and/or a guaranteed minimum income Guaranteed minimum income is a proposed system of income redistribution that would provide eligible citizens with a certain sum of money (independent of whether they work or not), also known as "Basic Income Guarantee (BIG)", "universal basic income", "citizen's income scheme", benefit. The product offers 60 investment options. The key to making the approach work is an educated adviser. "These sorts of products can be very complicated from a consumer point of view," said Kleuver. "Consumers would still say they are complicated, even with benefits built into the contracts. We work with advisers and sell through them. We give the sales rep the right tools." Kleuver said a one-size-fits-all product is likely to be appropriate for a small minority of potential customers. Perspective II, he said, was the fifth-best selling annuity through last year's third quarter. Its popularity stems from the fact it's flexible, he said. In fact, most of the variable annuity industry is looking ahead to the challenges of clients drawing assets while in retirement and is churning Firing one group of employees and hiring another. As companies move into newer, high-tech ventures, they often eliminate employees with older skills while bringing on new people who have computer programming, networking and Web experience. out living benefits aimed at securing the assets of retiring baby boomers. Reaching New Markets Variable annuities had previously been sold as mutual funds with tax deferral, which were primarily sold to wealthy investors who had money left over to invest after fully funding their Individual Retirement Accounts and 401(k) plans. But because boomers are beginning to retire, and since the power of tax deferral has diminished greatly in recent years through tax law changes, the game has changed, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. John Kawauchi, vice president of business development, individual investments, at Nationwide Financial Services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. . It is now the living benefits that attract buyers, and not just those with extra money to invest. They also attract the upper-middle and even the middle class with reasonable nest eggs Nest Egg A special sum of money saved or invested for one specific future purpose. Notes: Examples of the purposes for which nest eggs are usually intended include retirement, education, and even entertainment (vacations and cruises). that need to continue to grow, but also need to be protected and to provide lifetime income, he said. Kawauchi said reaching these people is mostly a sales and marketing issue at this point. "Our products will continue to get more complicated as far as what's under the hood under the hood - [hot-rodder talk] 1. The underlying implementation of a product (hardware, software, or idea). Implies that the implementation is not intuitively obvious from the appearance, but the speaker is about to enable the listener to grok it. ," he said. "That's why they can do all the amazing a·maze v. a·mazed, a·maz·ing, a·maz·es v.tr. 1. To affect with great wonder; astonish. See Synonyms at surprise. 2. Obsolete To bewilder; perplex. v.intr. things that they do.... So it simply becomes an issue of how we reach as many people who can reasonably benefit from our product, and that has to do with the simplicity of the sales process A sales process is a systematic approach for performing product or service sales. The reasons for having a sales process include seller and buyer risk management, achieving standardized customer interaction in sales and scalable revenue generation. , the marketing process and the buying process. And as we go downstream, we're using less-sophisticated distribution channels." Nationwide had been in a race with ING to develop the first version of a simple product, said Kawauchi. Having been "beaten to the punch,' Nationwide decided to go for a more significant new product that was to be introduced in March. It was designed to help continue to accumulate value and to guarantee a minimal amount of growth if held a stipulated period. It would allow transition to an annual income stream of 5% to 7%, of assets without annuitization. Owners would be able to turn the stream off and on at will. Axa Equitable's new variable annuity, introduced in January, automatically provides multiple benefits, but is structured to pass Condron's elevator test. Retirement Income for Life provides guaranteed regular income payments, access to account value and a death benefit. The payments, which are a percentage of the income base and can grow larger but not smaller, may begin immediately or later. The older an owner is when withdrawals begin, the greater the percentage applied. Payments increase when annual gains in the income base, if any, are ratcheted up. The death benefit disburses the greater of remaining account value or premiums less withdrawals. Owners choose among Axa Equitable's five asset-allocation investment options. Spouses may jointly own the policy. The guarantees cost an extra 1% or so above the cost of the investment product. "The question the consumer can answer for himself is whether it's worth 1% to get guaranteed income and guaranteed death benefits," said Condron. 'Sophisticated Simplicity' Allianz Life Insurance Company of North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere. also professes sensitivity about simpler products. "The bottom line is that consumers expect transparency in all products they buy, and our industry is no different," said Patrick Foley fo·ley n. 1. A technical process by which sounds are created or altered for use in a film, video, or other electronically produced work. 2. A person who creates or alters sounds using this process. , chief marketing officer and senior vice president. Allianz employs a standard Foley calls parallel interest: A product must be good for the consumer, adviser and manufacturer. Another product philosophy is that products provide control and flexibility. "That's why we only sell through independent agents and financial planners Financial Planner A qualified investment professional who assists individuals and corporations meet their long-term financial objectives by analyzing the client's status and setting a program to achieve these goals. " said Foley. "Our products are designed to be sold by a person." The company's LifeFund product, for example, provides life insurance; coverage for disability, critical illness and chronic illness; and even access to retirement income, all in one policy. The product has not sold as well as Allianz had hoped, but Foley said those advisers who have bought into it sell a lot. "What is happening with [equity-indexed annuities equity-indexed annuity A contract with an insurance company that promises periodic payments keyed in a specified manner to a stock market index. Unlike variable annuities, equity-indexed annuities specify a guaranteed minimum return that is typically 3%. ] is similar to the product-design cycle of almost any consumer product," said Foley. "When something new comes out, it tends to be very simple because it's a new idea. Then, when the idea takes off, people start focusing on the possibilities, and you end up with a product that has so many features and benefits that the consumer gets to the tipping point The point in time in which a technology, procedure, service or philosophy has reached critical mass and becomes mainstream. See network effect. See also tip and ring. and says this is too much. And then it cycles back to what I'd call sophisticated simplicity. That's when you can really focus the outcome of the product on what the consumer wants." EIAs have reached the latter stage, he said. Knowing Crediting Methodologies Can Improve Returns Equity-indexed annuities have been sold in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. for more than 10 with the same marketing angle: Participate in the gains of a stock market index, but with no downside risk Downside Risk An estimation of a security's potential to suffer a decline in price if the market conditions turn bad. Notes: You can think of this as an estimate of the amount that you could lose on a stock or other investment. . The mantra mantra (măn`trə, mŭn–), in Hinduism and Buddhism, mystic words used in ritual and meditation. A mantra is believed to be the sound form of reality, having the power to bring into being the reality it represents. was simple, and EIAs certainly out-performed the S&P 500 stock index during the 2000-2003 bear market. But the variety and complexity of the products mean some perform much better than others in certain market conditions, and that is what Mitchell Maynard is trying to define with an online rating service offered by his company, MCP (1) See Microsoft certification. (2) (MultiChip Package) A chip package that contains two or more chips. It is essentially a multichip module (MCM) that uses a laminated, printed-circuit-board-like substrate (MCM-L) rather than ceramic (MCM-C). Premium. The service, located at http://mcppremium.com/mcp_adv_ratings.htm, gives letter grades for the performance of dozens of EIAs over a variety of market conditions. At the heart of Maynard's work is his analysis of crediting methodology. The industry uses about 40 methods, most combining the elements of point-to-point, high point, annual reset, monthly or annual caps, monthly or annual averaging, and yield spreads. Maynard observed that the most consecutive zero-credit years one is likely to experience is three. "What's interesting is that if you're picking the right kind of EIA (Electronic Industries Alliance, Arlington, VA, www.eia.org) A membership organization founded in 1924 as the Radio Manufacturing Association. It sets standards for consumer products and electronic components. , one year can really wipe away a lot of zeros.... And when do the largest returns come? They come subsequent to the biggest declines." So in a recent year when the index rose a whopping 30% "after three years of zeros, having the right kind of EIA mattered. One that offered a 70% participation rate and a 2% spread earned 21% less the 2% spread, or 19%."So over four years, that's over 4% a year" said Maynard. However, a crediting mechanism using point-to-point with a cap might credit only 8% in the up year, he said. Maynard's Web site finds many of the most popular EIAs are under-performers over long periods due to the crediting methodology. "For me, the EIA should earn more than a traditional fixed annuity Fixed Annuity An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal. or something with zero principal risk, because there's a greater risk of income dispersion dispersion, in chemistry dispersion, in chemistry, mixture in which fine particles of one substance are scattered throughout another substance. A dispersion is classed as a suspension, colloid, or solution. ," he said. "You should get paid more because you have more of a risk of how returns are given to you and in what stream they come." Maynard maintains that product sellers ought to make an effort to identify what crediting methodologies perform better over a variety of market conditions, but they don't. Learn More Axa Equitable Life Equitable Life may refer to:
A.M. Best Company # 06341 Distribution: General agents, brokers ING Life Insurance And Annuity Co. A.M. Best Company # 06895 Distribution: Independent and career agents, banks, and broker/dealers Fidelity Investments Life Insurance Co. A.M. Best Company # 09138 Distribution: Direct and through company advisers Jefferson National Life Insurance Co. A.M. Best Company # 06475 Distribution: Broker/dealers, fee-only advisers and partners engaged in direct marketing Jackson National Life Insurance Co. A.M. Best Company # 06596 Distribution: Independent agents, brokers, banks Nationwide Life Group A.M. Best Company # 70350 Distribution: Wide variety of brokers, advisers, institutions and agents Allianz Life Insurance Co. of North America AM. Best Company # 06830 Distribution: Independent agents For ratings and other financial strength information about these companies, visit www.ambest.com. At a Glance: Variable Annuities</p> <pre> Variable Annuity Net Assets Net assets The difference between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on the other hand. net assets See owners' equity. ($ Millions) 9/30/05 6/30/05 12/31/04 9/30/04 Total Net Assets $1,175,761 $1,133,853 $1,124,233 $1,047,473 Source: NAVA NAVA National Association for the Visual Arts NAVA National Association for Variable Annuities NAVA Navajo National Monument (US National Park Service) NAVA North American Vexillological Association and Morningstar Inc. </pre> <pre> Quarterly Variable Annuity Total Premium & Net Flows ($ Millions) Quarter Ended 9/30/05 6/30/05 3/31/05 12/31/04 9/30/04 Total Sales $33,787 $33,533 $31,708 $31,364 $30,064 Net Flows 4,613 5,249 4,794 8,240 9,756 Net Flows as % of 13.7% 15.7% 15.1% 26.3% 32.5% total sales Total premium flows represent the sum of new sales, including inter- and intra-company exchanges, and additional premiums from existing contract owners. Net flows represent total premium flows minus surrenders, withdrawals, inter- and intea-company exchanges, and benefit payments. Source: NAVA and Morningstar Inc. </pre> <pre> The Price of 'Simple' Products Mortality & Expense Risk Company Product Charge ING Simplicity * 2% in first 10 years Fidelity Personal 0.25% Retirement Annuity Fidelity Lifetime 0.60% Income Annuity Jefferson Monument Advisor Flat fee of National $20 a month Axa Equitable Retirement Income 1.90% for Life * Surrender Company Fund Expenses Period ING 0.54% to 1.05% Five years Fidelity 0.1 % to 3.06% None Fidelity 0.78% to 0.92% None Jefferson 0.26% to 2.54% None National Axa Equitable 0.35% Eight years * Provides living benefits Note: Axa Equitable charges & expenses include other kinds Source: Company reports </pre> <pre> Variable Annuity Assets By Investment Objective (As a percent of total assets) 9/30/05 9/30/04 Equity 57.3% 54.6% Fixed Accounts 23.4 26.0 Allocation 8.8 8.0 Bonds 8.2 8.7 Money Market 2.3 2.7 Source: NAVA and Morningstar, Inc. </pre> <p>Third quarter 2005 total VA Sales increased 12.4% over third quarter 2004, Source: NAVA |
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