Looking Ahead: Making The Case For Income Annuities
New investors and new moneythe variable annuity industry desperately needs them in order to generate real growth, and stop relying so heavily on recycled assets that pass for “sales.”
But over the past several years, the industry has encountered increased difficulty in attracting new money, evidenced by sharp declines in net sales and sharp increases in exchanges from one VA to another. That cant continue. Recently-exchanged VAs are virtually untouchable for at least the next several years when they will still be subject to contingent deferred sales charges. In addition, regulators are taking a harder look at VA exchanges and suitability issues.
According to many in the VA industry, a major source for new investors and new money may be the millions of baby boomers, a generation that will start retiring within the next five to 10 years. Many of them will be looking for ways to convert billions of dollars of savings into an income stream.
However, this opportunity presents numerous challenges as wellmost notably, how to change the way consumers and producers view annuities.
If you build it, will they come?
As annuitization rates of deferred variable annuities are well below 1%, several firms are hoping to entice intermediaries to consider annuitization by returning to the original breed of annuitythe immediate annuity.
Todays immediate variable annuity (IVA) offers more features, and more flexibility, than its earlier counterparts. Income payment floors, stabilized payouts, bonus credits, and partial withdrawals are just some of the IVA features on the market today that address investor concerns and limitations of the traditional product.
The IVA is still a rarityFinancial Research Corp. has identified less than a dozen currently marketed IVAs versus over 400 deferred VA contracts. Proponents of income annuities contend that annuity firms that do not have a feature-laden immediate VA in place when the income boom begins could end up losing deferred VA assets to other firms IVAs.
As we learned in the FRC study, “Opportunity of a Lifetime: VA Income & Product Trends,” this is already occurring with some frequency.
Study participants that currently offer IVAs have seen a dramatic increase in the percentage of sales resulting from 1035 exchanges and qualified transfers, as indicated in the accompanying chart.
External exchanges accounted for nearly half of our respondents IVA sales in the first quarter of 2001, while qualified transfersbelieved to be among the largest potential sources of future IVA salesrepresented 25%.
Internal 1035 exchanges and qualified transfersmoney switched into an issuers IVA from one of its other annuitiesaccounted for a smaller but still significant portion of IVA sales.