The most recent shift in the audience for deferred annuity products may come as a surprise to many advisors who are accustomed to selling these vehicles to older clients in pursuit of secure income late in life. Insurance carriers have taken steps to break free of this typical market, in many cases by changing product cost structures to appeal to an expanded (and much younger) client base.
As a result, advisors need to recognize that this new generation of deferred annuity products can be marketed even to clients who are in their 30s, 40s and 50s, erasing the common perception that most annuity purchasers are those stereotypically risk-adverse clients who have already retired. Younger generations have joined the market for secure income, which should have every advisor asking this question: How young is my next annuity prospect?
Deferred Annuities: A Primer
Although deferred annuity offerings have undergone an evolution in recent years, allowing customization to create a secure stream of income in retirement that meets the individual goals of any given client, many advisors may have overlooked an entire generation of potential annuity contract owners. Despite the flexibility to change the timing of deferred annuity payouts, these products have historically appealed most strongly to an older client base—those who have either been retired for several years and fear outliving retirement savings and those clients preparing to enter retirement within a relatively short period of time.
Deferred annuities can now be used as a safety net for clients who reach old age (80 or 85) or can begin payouts much earlier in retirement. Insurance carriers have developed new products that can make these strategies appeal to the younger client much in the same manner as traditional annuity owners.
Deferred Annuities for a Younger Generation
In order to attract a younger generation of annuity contract owners, many insurance carriers have developed products with lower initial premiums (some have gone so far as to cut the initial premium to as little as $5,000).
Although many younger annuity purchasers have committed to further fund their deferred annuities in future years, a low initial premium allows clients to purchase deferred annuities that can be immediately contributed to individual retirement accounts without exceeding the annual maximum contribution limits established for these accounts.
This strategy allows the younger client to create a retirement plan on a tax-preferred basis that mimics the traditional pension plans offered by employers in previous generations. Further, the strategy can prove effective for younger clients whose employers may not offer a retirement savings plan.
Insurance carriers have also built a degree of flexibility into these deferred annuities with low initial premiums. While some clients intend to make annual contributions that approximate the IRA contribution limit, future contributions can be larger or smaller depending on the client’s goals. For many clients in their 30s or 40s, this is important because it makes these annuities affordable as they continue to bear the expenses of raising children, paying down mortgages and, in many cases, paying off student loans.
Recurring payments that allow younger clients to build the value of their annuity products over time can prove to be a critical selling point with younger clients, many of whom simply have not been saving long enough to establish the savings necessary to purchase a product with a high initial premium.
For younger clients interested in building a pension-style retirement savings account early in life, a deferred annuity strategy can prove extremely valuable, and insurance carriers have finally caught on to this market, providing products that are effective for the next generation of savers.
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