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.
Consumer Marketing Strategies
Remember that the figures cited above are based on the relatively few investors who have purchased IVAs in recent years. The fact remains that investors are reluctant to embrace annuitization, whether in the form of immediate VAs or annuitized deferred VAs. For the most part, this trepidation is the result of a basic misunderstanding of annuitization and the situations it addresses.
Many investors believe that they will live to be exactly the age specified in life expectancy tables. But there is a good chance they will live longer. Recent volatility in the equity markets should serve as a lesson that money managed independently might not last forever. Positioning a portion of assets in a VA with a lifetime payout option guarantees at least one dependable source of income, even if investors beat the averages and live past age 100.
Then again, as one product manager told us, nobody knows anybody who actually ran out of money. Instead, many believe the real fear is having to scale back their standard of living, or worse, becoming a financial burden to their children. This latter fear often drives investors to hold on to some of their assets rather than live off them in a well-planned way.
Variable annuity marketers need to convey the message that converting VA assets into lifetime income can be a sound financial plan.
On the flip side are those investors who are more than certain they have saved sufficiently for retirementonly to learn that their financial needs during retirement are not what they had imagined. VA providers should consider doing more to prepare older workers for the changes that come after that last paycheck is cashed to avoid the false sense of wealth that some retirees experience, and to address the lack of understanding of long-term money management.
Winning Over the Intermediary
As with individual investors, intermediaries reluctance to recommend annuitization or IVAs is also based on a lack of understanding of the products and their benefits.
To a large extent, it is the annuity industrys own fault that so many intermediaries view VAs solely as accumulation vehicles. By focusing so much of their marketing efforts on “out-featuring” the competition, issuers have steered intermediaries away from considering annuitization for their clients retirement needs.
Of course, to intermediaries, compensation may also play a role. Traditionally, reps were not compensated when annuitizing a deferred VA contract. Firms came to realize that retirement planning in general, and describing annuitization in particular, demand both training and time. Today, nearly all issuers pay reps some form of compensation, including asset-based trail commissions, although waiting periods between contract purchase and annuitization often apply.
Compensation structures on IVAs have changed as well, moving away from the traditional one-time payment upon contract purchase, to asset-based trail commissions.
Because so many products now offer reps a trail commission, locking up a clients money in a lifetime annuity also means the intermediary has also locked in a long-term source of regular income. And, with the flexibility afforded by many income annuities, reps are not necessarily relinquishing control of the assets when a client annuitizes.
In any case, more proactive discussion is needed on how to use income VAs as one component of a total financial plan for retirement. That sort of approach, if supported by wholesaler training and needs-based marketing programs, will draw the attention of financial planners and others who want to build their business on comprehensive programs and long-term relationships.
Art MacPherson is assistant vice president, senior writer, and Lisa Plotnick, FLMI, CLU, is senior analyst, VA analytical research, with Financial Research Corporation, a Boston-based financial services research and consulting firm specializing in competitive intelligence and analytical services. They can be reached via email at AMacpherson@frcnet.com and Lisa.Plotnick@frcnet.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, January 21, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.