Variable annuity contract holders appear to be entering an era of more efficient usage. The evidence of this is that withdrawal frequency rates are rising and more policyholders are withdrawing the maximum allowable amount under their GLWB income riders.
GLWBs, or guaranteed lifetime withdrawal benefit income riders, were introduced to variable annuities in the mid-2000s. Many variable annuities are sold with with such a rider.
In the past, about one-third of policyholders used their GLWB riders efficiently by taking out the maximum allowable withdrawal amount, one-third withdrew less and one-third withdrew more.
“That one-third each has dropped by the wayside, and now we are seeing about half of policyholders exhibit efficient behavior and taking the maximum allowable amount” under the GLWB rider, said Timothy Paris, CEO of Ruark Consulting.
For contract holders who don’t take the maximum allowable under the rider, it’s the equivalent of “leaving money on the table.” Meanwhile, annuitants who withdraw more than the rider allows erode their future benefits.
Reasons for Efficient Utilization
Why have contract holders become more efficient at using their GLWB riders?
One reason could be that GLWB riders are more popular than ever and advisors are more comfortable with how they work, Paris said.
Another could be that baby boomers are owning up to their longevity risk and sticking to their prearranged GLWB withdrawal windows and schedules.
Annuity companies also offer incentives to defer withdrawals within the first several years. Now that those periods are coming to an end, contract holders are beginning to monetize those incentives by taking larger withdrawal amounts under the GLWB rider, Paris said.
Ruark Consulting tracks annuity policyholder behavior based on data from 25 variable annuity companies with $905 billion in variable annuity account values.
Tracking policyholder behavior matters to annuity companies as they develop new products and set pricing assumptions for them.
Insurers also need to know how much money they must set aside in reserves and capital for in-force contracts.
Surrender Rates in First Half Revert to Norm
Withdrawal frequency for GLWB riders has passed the 24 percent mark, an increase of two percentage points over the past 18 months, Paris said.
This means that 24 percent of policyholders who have a GLWB rider are withdrawing income from it.
After a dip in 2016, variable annuity surrender rates rose again in the first half of 2017, the study found.
Surrender levels have returned to levels seen in 2010-2015, leading Paris to conclude that 2016 was an outlier in terms of surrender habits.
Lower surrender rates in 2016 could have been due to the uncertainty among advisors surrounding the Department of Labor fiduciary rule, he said.
The rule made variable annuities more difficult for advisors to sell.
The 2016 presidential election, in which Donald J. Trump eventually prevailed against all odds, also could have played a role in lowering surrender levels, Paris said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.
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