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Creative destruction is the idea that in the process of evolution, free markets can become somewhat messy while making progress. Although the world becomes a better place because of this evolution, progress, and upgrades, the process can be quite the disruptor for those who find themselves on the wrong side of creative destruction.
This comes to mind as you look at the latest trends in the annuity world. There have been wins as well as losses over the past four years. The variable annuity (VA) product line has struggled but fixed annuities, indexed annuities, single premium immediate annuities (SPIAs) and deferred income annuities (DIAs) have excelled.
What is causing the creative destruction in the variable annuity world? The No. 1 instigator was the 2008 financial crisis. During this time period, many manufacturers realized that guaranteed lifetime benefits (GLBs) were too costly for them to continue offering the living benefits. This caused a number of VA carriers to leave the VA business. If they continued, they eliminated products.
Again, with creative destruction there are losers but there are also winners. The winners of this process have been the new VA innovations introduced by the carriers over the past years. These recent VA innovations are investment-only VAs (IOVAs); VA + deferred annuity (VADAs); and structured product VAs (SPVAs), also known as buffered VAs.
Another benefactor of creative destruction within the industry is fixed indexed annuities. FIAs have been able to maintain strong guaranteed lifetime withdrawal benefit (GLWB) features that have been easily hedged within the design of a FIA product than in a VA product. The benefits that once defined the VA world are now defining the FIA world and other annuity products.
There is another source of creative destruction on the horizon, as the Department of Labor’s (DOL) fiduciary rule takes effect in April 2017. As of now, the DOL is mandating that FIAs fall under the Best Interest Contract Exemption in order for the financial professional to get paid commission. This upcoming rule will affect a fair amount of FIA business because the new regulation focuses on qualified money. Time will tell how significant the impact will be.
Despite the significant storms on the horizon, I believe the annuity will be able to put more emphasis on the creative and less on the destruction.
Taken from Charlie Gipple’s article in InsuranceNewsNet Magazine, August 2016: “How Creative Destruction Shapes the Fixed Annuity Market”
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Annuities are designed to meet long-term needs for retirement income. They provide guarantees against the loss of premium and credited interest, and the reassurance of a death benefit for beneficiaries.
An income rider or benefit (sometimes called Guaranteed Lifetime Withdrawal benefits, or GLWB) is an additional feature available with some annuities and generally optional and come with additional costs. Income benefits are designed to provide income options above and beyond the standard annuitization or free withdrawal features in annuities.
Fixed indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market Indices do not include dividends paid on the underlying stocks, and therefore do not reflect the total return of the underlying stocks; neither an Index nor any market-indexed annuity is comparable to a direct investment in the equity markets. Clients who purchase indexed annuities are not directly investing in a stock market index.
Pursuant to IRS Circular 230, Partners Advantage Insurance Services and their representatives do not give tax or legal advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Encourage your clients to consult their tax advisor or attorney.
The information contained in this article is not intended to serve as tax or legal advice and is not intended to provide financial or legal advice and does not address individual circumstances.
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