Guaranteed Withdrawal Benefits on Fixed Annuities
The May 28, 2007 edition of the National Underwriter, www.lifeandhealthinsurancenews.com, had an interesting article on these relatively new benefits. As I read it I thought back to my post here on May 15, 2007 on a related topic and the NYSID's position that an asset-based charge is not permitted (unless it is capped at $50.00/year based on a restrictive interpretation of the non-forfeiture law). One of my arguments to the Department on this issue has been that an asset based charge can be viewed as pro-consumer. The consumer can look at the benefit's value to them - the value of the guarantee - and make a decision about whether the guarantee is worth the charge. Especially with a fixed annuity when the asset base is more predictable, the charge can be evaluated. The NU article concludes that the guarantee in these fixed products is significantly smaller than the guarantee provided by a similar benefit on a variable annuity, but that for some consumers, this guarantee does have value.
The striking think about the position of the NY Department on this is that they don't say this benefit is not permitted in NY. Instead, they interpret the law to require that a company must design their product in a particular way. The mandated design is one that requires embedding the cost in the interest rate credited (and that rate cannot then go below the guaranteed minimum stated in the contract). While that is certainly a valid approach and a common one in fixed annuities, it would seem to be equally valid to have a separately identified charge for this benefit.
As the discussion of this issue progresses with the NYSID, it will be interesting to see if any room develops to look at this issue differently and to allow different methods of charging for this guarantee. Once the guarantee is permitted, then that really becomes the issue - how does the charge for the benefit work? If the Department can see its way to a less restrictive interpretation of the non-forfeiture law, then consumers will have the option in NY of selecting a product where their interest rate reflects the benefits they purchase or selecting a product where each optional benefit has its own charge identified.
