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'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, 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 test." If he can't explain a variable annuity to someone before the end of the ride, he's not doing a good job.

The characterization by Christopher "Kip" 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 have long offered tax deferral, 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 and rebalancing, and portfolio optimization. They also appeal because sales profits taken within a contract need not be reported to the IRS. 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, 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," 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 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 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. 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 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 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 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 John Kawauchi, vice president of business development, individual investments, at Nationwide Financial Services. 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 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," he said. "That's why they can do all the amazing 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, 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 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, 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" 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] 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 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 for more than 10 with the same marketing angle: Participate in the gains of a stock market index, but with no downside risk.

The mantra 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 Premium. The service, located at, 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, 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 or something with zero principal risk, because there's a greater risk of income dispersion," 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 Insurance Co.

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

At a Glance: Variable Annuities</p> <pre> Variable Annuity Net Assets ($ 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

$1,047,473 Source: NAVA and Morningstar Inc. </pre> <pre> Quarterly Variable Annuity Total Premium & Net Flows ($ 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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Comment:'Tis a gift to be simple: complex annuities scare off both buyers and advisers, so the industry is offering less intimidating products.
Author:Panko, Ron
Publication:Best's Review
Geographic Code:1USA
Date:Apr 1, 2006
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