Advertise

In this Section:
ANNUITIES

Rethinking The Ideal Buyer Of Annuities

Ever since the leading edge of the baby boomers became eligible for Social Security in 2008, many financial professionals have been focused on helping this large, important population segment transition successfully from accumulating assets to turning those assets into a reliable income stream. Not surprisingly, this transition has been accompanied by a surge of interest in both income security and annuities.

According to a 2012 survey by the Insured Retirement Institute (IRI) and Cogent Research, about 84 percent of financial professionals said they were having more retirement income-focused conversations than they had five years earlier. In the same study, 70 percent of financial professionals who sell annuities revealed that their clients actually had asked to purchase an annuity.

Often, for these retiring boomers, the solution of choice is the single-premium immediate annuity (SPIA). These SPIAs are designed to take a fixed sum – often from an individual retirement account or 401(k) rollover – and turn it into a predictable income flow. The effectiveness of this solution hinges on the idea that the annuity buyer indeed has chosen to retire, has a good sense of his or her other income sources, and knows what role the SPIA will play in delivering income.

 

Late Boomers?

What sometimes is forgotten in the quest to serve those in the leading edge of the baby boom are those other boomers – the ones in the boom’s trailing edge who are entering their 50s. Although clients in this age range traditionally haven’t been ripe for the income or annuity conversation, this situation is changing for a number of reasons.

One reason for the change is simple anxiety. Many 50-year-olds are seeing that their parents have robust traditional pensions that, combined with Social Security, provide a decent retirement income. By contrast, 50-year-olds may feel that such security is increasingly out of reach, especially without defined benefit pension plan payouts and with persistent signals of potentially-eroded federal retirement benefits. As such, many of these clients may harbor a simmering concern about the quality of their retirement lifestyle.

Accordingly, many of these younger boomers are getting an early start on recalibrating what their retirement vision might be. They realize that increasing lifespans, combined with potentially constrained finances, might be inconsistent with the traditional vision of a retirement that includes vacation homes or around-the-world excursions. Additionally, in other cases, they may shun the idea of leaving the workforce, instead intending to scale back work hours or start their own businesses.  For some, they simply want to open up their schedules to spend more time with family and friends.

 

The Annuity Conundrum

This combination of clients’ income anxiety and free-form retirement expectations creates a unique challenge for financial professionals. Such clients are not yet ready to retire, and thus do not have enough clarity about future income needs for a SPIA solution to fit.

In some cases, deferred income annuities can play a role, since buyers can delay their income start date and get higher monthly income payments at a time when they need that income. Still, there is a drawback. These annuities, like the SPIAs, generally provide limited to no flexibility in terms of clients’ access to their contract values that have been accumulating. Some clients in their early 50s, who see the possibility of an altered financial situation in their future or who just want more flexibility with their retirement income, may see this option as too restrictive.

 

New Model Emerging

For these trailing edge baby boomers, there is an emerging product type that aims to strike a balance between providing guaranteed lifetime income and affording enough flexibility if their financial circumstances change. This new variety of fixed annuity fuses certain features of a deferred income annuity, traditional fixed annuity and fixed index annuity to provide income, access to their contract’s value and potential “income base” growth through index credits.

This new product concept hinges on providing owners with an incentive to keep their money in the annuity for longer periods, while still giving them flexibility for times when they might need to access their contract values. The incentives built into the new concept can come in two forms and those incentives are applied toward the benefit value.  The first of these is a guaranteed “step up” in benefit value for owners who defer income payments. For example, if a client were to defer taking money from the annuity for five years, the benefit value base will get a boost. The longer the owner delays taking money from the annuity (subject to terms of contract), the greater the benefit value base. 

The second incentive built into this new concept involves the opportunity to capture potential growth of the income base based on changes to an index (such as the S&P 500® Index) during each contract year. This potential growth through income credits (which is subject to an index cap), combined with the “step up” benefit just described, may give the client a higher benefit value base, which is used to determine the amount of income payments.

 

Freedom to Move on

For trailing edge boomers, these new income fixed annuity products may even alleviate their uncertainty about locking into SPIA annuity contracts. For example, if a client determines after 10 years that he or she has enough income security from other sources, or if an inflationary period makes the annuity seem less desirable, the client can forego taking advantage of the “step ups” and index-linked income credits, take money out of the annuity contract value and move on.

 

Starting the Conversation

No doubt, trailing edge baby boomers are still at an age when their continuing contributions to tax-deferred plans are critical to pursue maximum potential asset accumulation. Thus, consideration of any annuity product must be done after weighing the pros and cons carefully.

Still, this new product concept gives financial professionals the opportunity to start a conversation about income with clients in their early 50s. By doing so, these professionals have the opportunity to address what might be deep-seated, hidden concerns about future income security – and build the foundation for relationships that may endure throughout their clients’ retirement years.

 

Kenneth L. Brown is the vice president of sales development & strategic support for ING U.S. Insurance Solutions’ annuity and asset sales business, overseeing marketing, product development, regional wholesaling, sales training and development, and wholesale operations for the company’s annuity business. Contact Ken at [email protected]

Kenneth L. Brown is the vice president of sales development and strategic support for ING U.S. Insurance Solutions' annuity and asset sales business, overseeing marketing, product development, regional wholesaling, sales training and development, and wholesale operations for the company's annuity business. Contact Ken at [email protected] .


More from InsuranceNewsNet