The original use for a variable annuity was to provide tax-deferred growth of your savings. Variable annuities were simple and were easy for consumers to understand. They were similar to mutual funds with their subaccounts, but within the bounds of an insurance product. The mortality credit was important to protect you and your beneficiaries from downturns in the market. Many of these things still hold true when it comes to variable annuities, but they have changed significantly as well. In the Life Health Pro article, “Variable annuities: Back to basics,” Ed McCarthy discusses the way that variable annuities have changed since they were first introduced and how they are changing again.
Since variable annuities first came about, they have undergone a lot of innovation. Changes have included new product features and additional benefits. New benefits are usually a good thing because consumers get more of what they are looking for in the same product, but with added benefits there came added costs and complexity. A variable annuity prospectus is confusing and many advisors don’t even understand all of the details that come along with the more complex variable annuities. These more costly and complex variable annuities also came with high commissions to advisors, something that the industry is moving away from. Fee-based and fee-only advisors are becoming more commonplace. These advisors are not interested in the high commission variable annuity products. Variable annuities have become more expensive for insurance companies to carry, so guaranteed income benefits have been decreasing and costs have been increasing.
When variable annuity income guarantees became prominent, the market was right for both insurance companies and consumers to get great benefits. Insurers found that changes in the market very negatively affected their books when it came to variable annuities. When consumers could no longer get the income guarantees for the same cost, they were unhappy with their products. All of these changes have brought about a new type of variable annuity industry. The industry is getting back to basics. Jefferson National is changing their focus and bringing variable annuities back to where they once were. They found that the important tax deferral was getting nullified by too many other benefits adding costs and fees to variable annuity products. Jefferson National’s Monument Advisor VA focuses on the value of tax deferral and has more than tripled its sales in three years. It maintains more than 380 competitive investment options and has a flat monthly fee of $20 regardless of the contract value. Jefferson National thinks that more variable annuities will go back to the basics and offer simple contracts that are focused on tax-deferral and maintain low costs to consumers.