Variable Annuity History
The variable annuity has always offered long-term investment opportunities and life insurance protection, though the features and benefits have become increasingly more generous and complex as insurance companies competed to win investors’ dollars.
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Variable Annuity History
In 2016, more than $222 billion in annuities were purchased, cementing their central role in helping individuals build a secure retirement income.1 Annuities in America predate the formation of the United States. The first recorded use of annuities was in 1759, though they did not become generally available to individuals until 1812. It wasn’t until the early 1900s that annuities established themselves in the financial firmament, as individuals grew shy of stocks following the 1929 crash.
The first variable annuity was introduced in 1952, with many of the features we see today added in the subsequent years. Indexed annuities are a more recent innovation, first appearing in the late 1980s.
One of the key areas of annuities’ growth has been in the variable annuity space, which now accounts for almost $2 trillion in assets. The variable annuity has always offered long-term investment opportunities and life insurance protection, though the features and benefits have become increasingly more generous and complex as insurance companies competed to win investors’ dollars.
The late 1990s and early 2000s witnessed the introduction of more investment choices and significant death benefit enhancements. In response to the Baby Boomer retirement wave and the rich vein of 401(k) savings, insurers rolled out the guaranteed minimum income benefit (1996), enhanced earnings benefit (2000), guaranteed minimum withdrawal benefit (2004) and the standalone lifetime benefit (2008).
In the wake of the 2008 credit crisis, the financial burdens of these guarantees on insurers became too high, leading to a sharp retreat in the scope of investment and income guarantees previously offered. Increases in rider fees, reductions in benefits, fund allocation limitations, lower risk fund options and the closure of products to new sales were just some of the industry responses.
More recently, in a “Back to the Future” moment for the annuity industry, IOVAs (or investment-only variable annuities) have grabbed a growing share of variable annuity sales. Stripped of the bells and whistles that accumulated in the previous decade, these IOVAs are the basic annuities that were sold to prior generations.
With the pending changes to the DOL fiduciary rule, the variable annuity is again set to undergo a seismic change in landscape. The upfront commission compensation structure has become problematic in meeting the higher fiduciary standards under the new rule. In response to this change, insurance companies have begun introducing fee-based variable annuity products designed without an upfront commission and on which the advisor receives an asset-based advisory fee. There have also been products introduced with ETF-only investment options, as well as advisory versions of existing annuity products. Stay tuned for further changes.
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