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Surrender Charges’ Disappearing Act

Surrender charges on fee-based variable annuities seem to be retreating faster than the polar ice caps, new filings reveal.

The shorter surrender periods and no surrender charges are the result of annuity companies offering fee-based financial advisors new options that coincide with the dawn of the Department of Labor’s fiduciary rule. The rule began taking effect June 9.

Nearly two dozen of these contracts were filed between Dec. 1 and May 30, Morningstar’s filings indicate.

“These advisor-sold contracts typically have no surrender or a very short surrender (period) with very low penalties,” said Kevin Loffredi, senior product manager, annuity solutions, for Morningstar.

Surrender charges penalize an annuity contract holder for canceling the contract before a certain date. They also allow insurance companies to recoup their commissions paid upfront to advisors on the sale of a commission-based contract.

Charges typically are pegged to a sliding scale with higher charges in the earlier years and lower charges in the later years before disappearing altogether.

With commission-based variable annuities, insurers bear a greater portion of the risk than with a fee-based model.

“Shorter term surrender charge products are in our future, whether it’s fixed, indexed or variable; that’s what I’ve heard,” said annuity seller Bob Quinlan, owner of Quinlan Insurance & Financial Services in Winona, Minn.

Under a fee-based model, advisors earn a fee even if the investor turns in his or her variable annuity early after a year or two. That represents a much lower risk for insurers.

Lincoln Financial, Voya Financial, AIG, Jackson National, Transamerica, Nationwide, Pacific Life and Great West Life have recently launched variable annuities with no surrender charges, company websites indicate.

Lower surrender charges could provide a boost to new variable annuity sales, which fell 21.4 percent to $101 billion in 2016 compared with 2015, Morningstar reported earlier this year.


Sales of 10-Year Products Soften

In the coming months, advisors can expect insurance companies to release more short-term surrender products, said annuity market expert Sheryl J. Moore. Moore is president and CEO of Moore Market Intelligence and Wink Inc.

Insurers perceive longer surrender charge products as harder to justify under the fiduciary rule’s best interest contract, she said.

First-quarter sales data appear to bear this out.

In the first quarter, 22.1 percent of fixed indexed annuity (FIA) sales were for FIAs with a seven-year surrender period. This is compared with 16.2 percent in the first quarter of last year, according to Moore.

Compared with the year-ago quarter, FIAs with shorter surrender periods racked up higher percentage sales gains than FIAs with longer surrender periods, Wink reported earlier this year.

FIAs with durations of more than 10 years have seen a drop in first quarter sales, said Carolyn Johnson, CEO of annuities and individual life with Voya.

“We’ve seen a shift from our 10-year to our seven-year product,” she said.

Quinlan, the annuity agent, sells two or three indexed annuities out of the dozens he has access to. He said the most popular is the seven-year surrender charge FIA.

“The 10-year surrender charge is too long,” he said.


Recent I-Share Low/No Surrender Charge Filings

Advisor-sold variable annuity contracts with no surrender or short surrender penalties are called I-shares.

A listing of recent I-share filings or other variable annuities carrying no surrender charges or relatively low surrender charges appears below:

Product Company


Core Income with I-Shares              Lincoln National


Polaris Advisory Income                   AIG


Elite Access Advisory                         Jackson National


TA Variable Annuity I                         Transamerica Life


Investor Advantage RIA Class        Lincoln National


American Legacy Advisors               Lincoln National


Choice Plus Advisory                          Lincoln National


Investor Advantage Advisory          Lincoln National
Smart Track Advisor                          Great West Life
Pacific Odyssey                                   Pacific Life
Destination Architect 2.0                 Nationwide
Preferred Advantage         Voya


InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected] [email protected].

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