Immediate annuities, also known as income annuities and payout annuities, can replace disappearing corporate pensions, but sales have been tepid.
LIMRA, a research, consulting and professional development organization, reported that income annuity sales reached $8.7 billion in 2012, a small percentage of total annuity sales, which reached $219.4 billion. Insurers have responded by offering features such as liquidity, death benefits, and flexible income options for income annuities.
Amid these changes, advisors who are engaged in retirement income planning are beginning to take a second look at income annuities, according to Mark Paracer, research project director at LIMRA. Paracer pointed to a 2012 LIMRA study that brought responses from more than 1,000 advisors.
“Our findings showed that more advisors are interested in guaranteed income products in general (32% in 2011 vs. 31% in 2009),” he said. “That was especially true for RIAs (33% in 2011 vs. 24% in 2009).” That study also indicated that guaranteed income solutions are often well received by clients: 63% of advisors agreed while only 7% disagreed.
“Most importantly,” Paracer said, “the attitudes of advisors are shifting to more recognition of the benefits of guaranteed income solutions versus the benefits of non-guaranteed income solutions: 56% in 2011 vs. 40% in 2009. There is also a shift in advisor attitudes toward the idea that a guaranteed income solution should be used to cover non-discretionary expenses in retirement: 48% in 2011 vs. 38% in 2009.”
Paracer noted that including an income annuity — either deferred or immediate — can help retirees ensure that at least their essential expenses in retirement are covered, thus allowing advisors to invest the remaining portion of their portfolio with a goal of higher returns.
According to Lowell Aronoff, CEO at CANNEX Financial Exchanges Ltd., which compiles data on financial products, there is a disconnect between the need for income annuities and the amount of sales. “Retirement income research universally suggests that income annuities should be a core product for nearly all retirees,” he stated, “yet sales of these products are still fairly modest.”
One objection to income annuities has been the “hit by a truck” fear. A consumer might buy an annuity that would pay a lifetime income and die soon afterwards, thereby relinquishing capital for little return. A recent joint study by CANNEX and LIMRA found that annuity issuers now address this concern.
All of the insurers in this joint study offered the simplest form of death benefit: if the annuitant dies, payments can continue to the estate for a specified number of year. Most of the companies surveyed offered at least one payout option that provides additional money upon the annuitant’s death. One option guarantees continuing payments until the sum received equals the initial amount invested.
LIMRA reported that advisors have objected to recommending income annuities for their clients because of the loss of liquidity. The joint survey with CANNEX, though, found that the majority of immediate annuity issuers— including 9 of the top 10 companies— offered access to cash outside of the scheduled payments in case of emergency or other needs. This liquidity may come via access to the guaranteed payments, access to the life contingent payments, or an advance of several months’ of scheduled payments.
All of the top 10 sellers of income annuities offered a cost of living adjustment option that allows retirees to receive increasing income and address inflation, which is a chief concern. Retirees can choose various COLA rates of up to 6% or more at some insurers while other companies offer payments that are pegged to the Consumer Price Index.
Sales of deferred income annuities reached $1 billion in 2012, according to LIMRA, up from $200 million in 2011. With a deferred income annuity, a 50-something client might purchase an annuity that would begin payments a decade or so later, when lifetime payout rates can be higher than current interest rates would allow. Paracer revealed that last year’s sales total for income annuities (immediate and deferred) of $8.7 billion was the largest on record, and he said LIMRA estimates total income annuity sales will top $10 billion by 2014.