This post is a follow up to my last one – admittedly on the late side – but I got some great feedback on that one and decided to let the ideas germinate a bit before I put them to paper. Now I am doing so.
In the post I expressed the opinion that the industry should reconsider using the term “Investment-Only Variable Annuity” to describe a “back-to-basics” contract with few or no guaranteed benefits. IOVAs are but one manifestation of the industry’s secular de-risking trend.
A good number of industry people agreed with me, that “investment-only” might prompt watchdogs or legislators to say things like: “oh, so it’s only an investment vehicle, and not for income taking? Then why should we allow owners to defer taxes on those assets?”
I also had an informal conversation on the subject with one of the speakers at last month’s LIMRA/LOMA/SOA Retirement Conference, who agreed with my concern, and told me that even now there are legislators contemplating putting a cap on tax deferral in insurance products.
The rub is, as I noted in the last issue of The Soleares Report, the IOVA acronym seems to have become such a part of industry parlance that it’s probably here to stay. So as if to solve for that, some folks have started to use the term “investment-focused” VAs. That makes sense to me.
All that said, there is another concern out there regarding the IOVA concept – one that can’t be ignored – and which gets into the title of this post (it was voiced by another contact, who won’t be named, in response to the last blog).
The issue is that the typical VA without guarantees has an inherent shortcoming, namely that its fees are high compared to other investments (especially index funds and ETFs), and these expenses cause a drag on performance. This drag, or differential, is what some people (like my unnamed contact) are calling a “delta” which can make it extra difficult to justify the sale of an IOVA.
Moreover if one starts thinking about selling a VA in a qualified plan or IRA, where the tax deferral aspect would be redundant, there might be even more of a need for some feature or benefit on the contract.
This thought arose during some insurers’ Q1 earnings calls (see the May 11 issue of the report). Analysts asked whether proposed new Department of Labor fiduciary rules might discourage qualified sales of VAs without guarantees. I thought insurance execs were somewhat cagey in their answers. A few hinted that if their production on the Q side were to slow, they would find ways to ramp it up in other channels. Others weren’t worried because they think living benefit sales will never totally go away because there remains such demand for them (I agree with that, although benefits should become steadily more modest).
So it seems that IOVAs could face some headwinds, although those with very low fees may not be in such trouble. I think that any way to dress up the IOVA would be welcome. Already some carriers have added deferred income annuity (DIA) sleeves into their contracts – which should serve to encourage annuitization and thus income taking, which in turn help counter accusations that the products are meant only for accumulation.
In closing, I’ll simply say that the next few years should be a time that will tell us whether or not the appeal of IOVAs will wane. During that period I expect insurers will be adding more innovations and enhancements to the concept, and am looking forward to seeing what those will be.
One more thing: there will not be an issue of The Soleares Report published this coming Monday due to our annual Memorial Day observance. I hope you all have a great holiday.
