The aging U.S. population will spend more years in retirement than members of previous generations. In addition, they will be less able to depend on pensions and Social Security. These demographics create a need for a solution that can protect against inflation and longevity and provide for guaranteed retirement income. An income annuity, either immediate or deferred, is well-suited to meet this need.
Right now, sales of income annuities are reaching an all-time high, despite a very low interest rate environment. A joint LIMRA/CANNEX study, Features in Income Annuities, noted that in the last 10 years, income annuity sales increased more than 80 percent from $4.8 billion in 2002 to $8.7 billion in 2012. (See chart.) Current sales trends suggest that these products are poised for continued growth. In fact, LIMRA estimates that by 2014, sales of immediate annuities alone will top $10 billion. This milestone seems within reach as a few large insurance companies keep their focus on the marketplace.
Deferred income annuity (DIA) sales are growing, too. Nine companies currently offer a DIA and an additional eight companies are planning to introduce their own version of this product. While they are still a small percentage of the overall income annuity market, deferred income annuity sales reached more than $1 billion in 2012.
Variable annuities with living benefits remain a more popular guaranteed income option for baby boomers planning for income to be received later in retirement, as evidenced by $80 billion in sales in 2012. However, recent pullback on variable annuity guarantees has increased the deferred income annuity’s value proposition as the product that provides the highest guaranteed payments in that market segment.
For advisors, that means plenty of opportunity. A prior LIMRA study revealed that one-third of advisors and registered investment advisors are interested in guaranteed income products. Also, two thirds of advisors who offer guaranteed income solutions find these products are usually well received by clients.
Finally, advisor attitudes are shifting toward the idea that a guaranteed income solution should be used to cover non-discretionary expenses in retirement (48 percent in 2011 versus 38 percent in 2009). In fact, the benefits of guaranteed income solutions versus non-guaranteed income solutions were acknowledged by 25 percent more advisors in 2011 than in 2009.
Advisors who offer immediate and deferred income annuities can appeal to several market segments. Immediate annuities are targeted primarily to those already in retirement and provide for regular income payments which commence immediately. A deferred income annuity typically is targeted to pre-retirees to attract younger investors with a long deferral period, as well as to baby boomers rolling over assets from other retirement savings plans.
Recent designs have incorporated features that increase liquidity, flexible payments and other additional guarantees. The majority of immediate annuities – including nine of the top 10 companies – now offer access to cash outside of their scheduled payments in case of emergency. This liquidity may come in several forms: access to the guaranteed payments, access to the life contingent payments or an acceleration of several months of scheduled payments in advance. All of the top 10 companies currently offer their clients a cost of living adjustment (COLA) option. Retirees can chose fixed rate increases of up to six percent or more. Other companies offer payments that are aligned with the Consumer Price Index.
While it’s easy to make a case for why income annuities fit into an overall retirement plan, there are very real challenges for advisors. To start with, clients are reluctant to lock in today’s historically low interest rates. On top of that, advisors face disincentives to sales due to loss of assets under management (AUM) credits. Finally, many potential clients avoid irreversible financial decisions when they don’t fully understand what they’re buying.
Despite these obstacles, however, genuine opportunities for growth exist. The challenge will be in marketing income annuities properly to educate advisors and clients of their benefits. Including an income annuity – either deferred or immediate – can help clients cover their essential expenses and allow an advisor to invest the remaining portion of their portfolio with a goal of higher returns.
Mark Paracer, senior analyst for LIMRA’s Retirement Research, is the project director of several benchmarking studies on variable and indexed annuity guaranteed living benefit election rates, as well as a new survey on in-plan guarantees. He is also responsible for conducting research on retirement income. Contact Mark at [email protected]