Enhanced death benefit features, once only in the domain of variable annuities, are spreading into the indexed annuity market.
Twenty-one percent of indexed annuities now sport the features, said Sheryl Moore, president of Moore Market Intelligence, an indexed annuity resource. Moore said that at least 60 policies out of the 282 indexed annuities that her firm tracks have some sort of enhanced death benefit.
A good many of the features debuted in the past nine months or so. That’s even though the first indexed annuity death benefit came out in 2006 and even though some carriers began introducing their own versions after the 2008-2009 recession.
What and Why
What are these features, and why are more of them coming out?
Typically offered as riders, these features essentially bump up the death benefit beyond the policy account value in certain ways and subject to certain conditions. Moore said they come in three basic varieties, although under different names and with different terminology.
The most popular version, she said, links the death benefit with the benefits base in a guaranteed lifetime withdrawal benefit (GLWB) that the customer has purchased with the indexed annuity. The “benefit base,” which is separate from account value, typically grows by a certain percentage of premium (the rollup percentage); it is used to determine the amount of income the owner can receive from the policy. If the GLWB rider also includes an enhanced death benefit provision, the benefit base amount also will be the death benefit, subject to certain conditions.
Another version is similar to the guaranteed minimum death benefit (GMDB) in variable annuities, Moore said. Here, the death benefit will equal premium paid in, plus a certain percentage of premium for a specified period (say, up to 10 or 15 years) and/or subject to a specified maximum amount (say, 200 percent or 250 percent of premium paid).
The least frequently used version is a feature that will, upon death, pay a certain percentage of gain to offset any tax burden the beneficiary may experience upon death.
There is usually a cost for the enhanced feature, Moore pointed out.
Regardless of the form they take, the enhanced death benefit features in indexed annuities share the attribute of paying beneficiaries something more than principal and gain, which is the typical death benefit in indexed annuities.
Carriers are offering them so they can keep something new and different in front of independent agents, who are the primary sellers of indexed annuities, Moore said.
Due to economic issues in the slowly recovering economy, the carriers have had to lower the caps on indexed annuity interest crediting, she explained. In addition, they have had to cut back on the rollup percentages they offer with their GMWB riders.
So, the enhanced death benefit features provide producers with something new to talk about.
There is another reason too: The death benefit provides annuity producers with some options for clients who ask, “What happens to the money in my annuity when I die?”
The indexed annuity producer is probably not going to turn around and start selling life insurance at that moment. But the producer who has access to indexed annuities with an enhanced death benefit option just might point out that the customer can choose between buying an indexed annuity that pays a basic death benefit (principal plus gain) or one that pays an enhanced death benefit (principal plus gain plus the enhancement).
This could be appealing to some independent agents, many of whom only sell annuities in a transaction-based environment, Moore noted.
Producers who specialize in annuities tend to stay away from selling life insurance, she added. That can be for various reasons – the focus in life insurance on protection rather than accumulation and income, the longer sales cycle (due to life underwriting), the different sales approach, etc. These products do not require the producer to engage in that kind of sale, she said.
Enhanced death benefits don’t drive sales in indexed annuities any more than they do in variable annuities, Moore said. “The focus is still on the income rollups and bonuses. Those are indexed annuity features that independent marketing organizations point out when they are out recruiting for new producers.”
But the enhanced features do provide producers with a policy option to consider for certain clients in certain situations.
Recent examples of indexed annuity enhanced death benefits include the new
enhanced death benefit features in indexed annuities from Midland National Life and North American Company for Life and Health. Both carriers are affiliates of Sammons Financial Group.
The products from the two affiliates – North American’s NAC SecureChoice and Midland’s MNL SecureVantage – include a built-in GMDB for no extra charge, and offer what the companies call a “stacking roll-up credit.” This is essentially the enhanced death benefit.
The goal is to maximize the death benefit via a combination of bonuses and the stacking roll-up credit plus interest credits, according to both carriers
In addition, the policy offers the option to add an optional lifetime income rider, for a cost, with “stacking roll-up potential” as well.
Great American Life Insurance has an enhanced death benefit rider for its indexed annuity portfolio called Inheritance Enhancer.
This is an optional rider that is available for a charge. It allows policyowners
to receive a 7 percent roll-up of the “death benefit base” for 15 years (or death, if sooner). The rider also allows owners to receive a refund of rider fees in some cases, and it lets the beneficiaries choose whether to receive a lump sum payout or to annuitize the death benefit base amount.
The Phoenix Companies has something like an enhanced death benefit in its Phoenix Next Generation indexed annuity which it is distributed through an exclusive network (via AltiSure Group). The company does not use the “enhanced death benefit” terminology but the feature has a similar effect.
The policy is available in “bonus” and “non-bonus” versions, and customers can also purchase a “protected inheritance benefit” for an additional charge. This benefit combines a GLWB and a return-of-premium death benefit.
Here is where the enhanced-like feature comes in: If the customer elects the bonus version, the policy’s account value and its return-of-premium death benefit will both increase by between 6 percent and 10 percent of premium (depending on the state). That bump-up in the death benefit can be viewed as an enhancement.
By contrast, if the owner takes the non-bonus version with the protected benefit, the return-of-premium death benefit will still pay out the percent of premium the owner had elected at issue (100, 75 or 50 percent) but the death benefit amount will not be increased (or “enhanced,” for purposes of discussion here).
It is apparent that indexed annuity providers are taking different approaches with their death benefit designs. This squares with what now appears to be a tradition for this industry: The indexed annuity carriers go their own way in policy design. This has been the case with index calculations, caps, living benefits features and other policy elements.
The industry has borrowed some ideas from variable annuity contracts, which have had enhanced death benefit features for a number of years. For indexed producers who also have variable annuity
experience, that yoking of concepts may help them get up to speed on the indexed annuity enhanced death benefits. But since the indexed versions differ from variable versions as well as from each other, they’ll still need to study each feature carefully.