VA Variables: Advisors are struggling to keep up with a constant stream of permutations on living-benefit riders.

Like many reps these days, Chip Hutchison, a registered rep at Family Trust Federal Credit Union in Rock Hill, S.C., has many clients who are worried about funding the second half of their lives. One client, a retired widow, had $250,000-half in cash and half in a 401(k)-that was invested in the stock of her former employer's company. The plan was declining instead of growing. At the same time, the widow who had been drawing $6,000 a year from her savings, found that she needed double that. "She was worried that at that rate she'd exhaust half her retirement fund in eight years," Hutchison says. He recommended rolling her holdings into a new variable annuity from Alliance Insurance called "High Five," which would guarantee her an annual 5% payout, or about $12,500 a year. Moreover, the contract ratchets up the payout if the invested funds do well. "I told her that the guaranteed payout can only go up, not down," he says. "She said, 'That's too good to be true!' "

Since the techwreck of 2000, insurers have been adding guaranteed returns to variable annuities that protect returns against market downdrafts. But insurers are now trying to appeal to the ranks of retiring boomers with annuities that reset to boost investor returns-often for life-or allow owners to withdraw cash without penalties. Indeed insurers are coming out with a dizzying variety of permutations on the living-benefit rider. This is both a blessing and a curse for advisors. On the one hand, attractive benefits make these products easier to sell. On the other hand, a constantly changing stream of complicated guarantees, make variable annuities increasingly difficult to understand-let alone explain to clients.

And advisors will have to get good at explaining these options come May 5, when a new rule, FINRA 2821, further tightens the suitability requirements for variable annuities. "Anyone selling a deferred-benefit annuity needs to make certain that the client is informed and understands about surrender periods and charges, about what the risks are, and about the insurance and investment components of a product," says Mike DeGeorge, general counsel at the National Association of Variable Annuities (NAVA), an industry trade group in Reston, Va. "They need to establish that the particular customer will benefit from the particular features of a product, based on that customer's particular situation."

MONUMENTAL TASK

That won't be easy given the current incentives to tinker with these riders. Guarantees are the engine driving growth in the VA market, says Frank O'Connor, VA product manager at Morningstar. According to NAVA, total sales of VAs through the first half of 2007 reached $88.2 billion, an increase of 10% over the same period a year earlier. Assets in variable annuities reached $1.5 trillion by the end of the second quarter of 2007, up 4.5% from the first quarter and 15.3% over the same time last year. Clearly this is where the money is for annuity providers. Ken Kehrer of the Princeton, N.J.-based research firm Kehrer-LIMRA, says that the top five variable annuity issuers have raked in over a third more in premiums over a third in the past year, and most of the gain has been in the living-benefits area.

It's no wonder providers are fighting over that money. "It's become a bit of an arms race," says O'Connor. "We have been seeing a lot more structural modifications this past year: step-up annuities that allow you to capture market gains, annuities that guarantee you a benefit no matter how long you live or how your portfolio performs, annuities that let you take out more money if you need it. A lot of it can be competitive tricks. But as the competition heats up, the benefits are getting better, even if the cost needle hasn't moved much."

Since issuers are changing their benefits programs quarterly, keeping track for financial advisors has become a "monumental task," says Tori Bullen, senior vice president of Jackson National Life, a provider based in Lansing, Mich. A guaranteed minimum benefit annuity might change its benefit of 5% per year to 6%, or insurers might permit it to start paying out at age 60 instead of 65. "Reps need to know that so they can present their clients with all the options," he says.