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Changes Ahead for Variable Annuity Market

The title of this article, “Variable Annuity Outlook 2013: Tough Road Ahead,” seems to say it all.  But there is more than meets the eye for variable annuities next year and you need to delve into the industry to really see what is ahead.  Advisor One’s John Sullivan says that two of the changes to expect are a move to RIA compensation models and a change in the focus of the benefits.  The variable annuity market is definitely in a transition phase, causing former top players Sun Life Financial, Hartford, and Genworth to exit the industry altogether.

The living benefits and guaranteed income features that made variable annuities popular ended up putting some top life insurance companies in a dismal financial spot.  Unfortunately, a lot of products did not hedge their market exposure in a way to protect themselves in the markets.  So when the markets tanked in 2008 and investors opted for their guaranteed income streams, many companies nearly became insolvent.  Some companies just said forget it and decided to exit the variable annuity market after picking up the pieces.  But others have realized that they just have to make some changes to the way they offer variable annuities and these products can still work for both investors and insurers.

Moving to a fee-based model seems to be one of the biggest changes coming into this industry.  And while the companies shying away from variable annuities see the benefit of changing to this model, they aren’t willing to put in the effort to build their business plans from the ground up again.  Jefferson National’s CEO says that while some companies have tried to change their existing infrastructure to fit the fee-based model, building from the ground up is probably the best way to ensure success changing models.  Jefferson’s Monument Advisor was one of the first flat-fee variable annuities to come into the market.

The fiscal cliff has everyone talking about taxes and that holds true in the variable annuity industry as well.  Advisors are more concerned about asset location and asset selection to get their clients the best use of tax-deferral benefits.  Sometimes the basis points for tax-deferral are too high and the benefit almost becomes null and void.  2013 will likely bring about more focus on getting the best tax-deferral benefits for investors.  Another continuing trend will be the issue of fiduciary responsibility when it comes to annuities.  This issue is affecting all financial products and is especially relevant with someone new heading the SEC.  Keep watch here for all of the variable annuity happenings heading into 2013.

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