Annuitization And Immediate Annuities:

Big Opportunities Unfolding

By

Las Vegas

We believe the annuitization market could exceed $200 billion, said Matthew Drinkwater here at the annual annuity conference sponsored by LOMA, LIMRA International and the Society of Actuaries.

An associate scientist in the retirement research center of LIMRA International, Windsor, Conn., Drinkwater supported his prediction with information from LIMRAs ongoing research into the annuity market.

The realized market data shows that annuitization business, in 2002, came to $7.3 billion in sales, he said. And, when combined with the $5.4 billion in immediate annuities sold for the year, the total annuity income market in 2002 represented roughly $12.7 billion, he said.

But, going forward, the research suggests there will be unmet demand and enormous opportunity for annuitization of annuity assets, Drinkwater contended.

For example, by combining a number of data sources, LIMRA has arrived at what Drinkwater termed the unrealized annuitization market. For the U.S. population at this time, this unrealized market amounts to roughly $202 billion, Drinkwater said.

That figure is a projection drawn from data produced by a LIMRA survey in the summer of 2003. The survey sampled views of U.S. consumers, aged 50-75, who have $50,000 or more in investable financial assets, says Eric Sondergeld, corporate vice president and director of retirement research at LIMRA.

To arrive at its figure for the unrealized annuitization market, LIMRA projected its survey results onto the broad U.S. population in the same market segments as in the survey, he says. The $202 billion figure represents the roughly 20% of this markets investable assets that could be annuitized, Sondergeld says.

As shown in the chart, this market breaks down this way: An estimated $37.2 billion could be annuitized from people who plan to retire within 5 years; $50.4 billion could be annuitized from people who plan to retire in more than 5 years; and $114.4 billion could be annuitized from people who have already retired, according to Drinkwater.

Those are not annual numbers, Sondergeld points out. For example, the pre-retiree segments likely will have more money available for annuitization when they retire due to growth in asset values. But the number is unrealized, he stresses. It will only be realized if the annuity industry takes advantage of the opportunities the market offers.

In his presentation, Drinkwater noted that not everyone should annuitize. He cited as examples people who are in poor health, who have generous pension benefits or who are able to live mostly with their Social Security benefits.

But other people will need and want to use money from existing assets for retirement income, he indicated. The annuity industry has a huge imminent opportunity in offering annuitization and selling income contracts and guarantees to these people, he concluded.

Such individuals could annuitize assets from any financial product, not just deferred annuities, points out Sondergeld. Examples include CDs, IRAs, 401(k)s and mutual funds.

Another session at the meeting addressed opportunities related to immediate annuity products.

Based on LIMRA statistics, IA sales have been running at about $5 billion a year for the last 2 years, noted James R. Baumstark, director of payout annuity product management at Allstate Financial, Northbrook, Ill.

The top 3 reasons for purchase are: to provide guaranteed income in retirement; to provide for specific retirement expenses; and to avoid being a financial burden on the children, Baumstark noted, citing LIMRA statistics. Other reasons include: a desire to pay for long term care policies or life insurance, to provide temporary income until Social Security or pension benefits begin; to spread out tax liabilities on highly appreciated assets; and to avoid IRS penalty taxes.

Most agents hate immediate annuities. They call [using] them annuicide,” allowed Bill Waldie, senior vice president-product development and industry relations at Transamerica Capital Inc., Cedar Rapids, Iowa.

However, “over the next 10 years, well make our money helping boomers to spend what they have saved” by selling such products, he indicated.

But the industry will need to come up with products for each stage of a boomers retirement, Waldie said. For instance, there should be products to fund the boomers initial “fun in the sun” stage, he said. And there should be other products for those who are starting a new career, whose spouse is taking on a new initiative, and who cannot afford to retire.

Flexibility will be the key, he said, specifying “flexibility in design, service and value down the road.”

Waldie noted that a growing concern among employed and retired people alike will factor into this market. This concern is whether people will be able to maintain their current lifestyle while in retirement.

“Todays boomers want someone to help them do that,” he said. “They learned from the 1990s that they cant do it all on their own.”

Waldie offered several suggestions for using immediate annuities for this market, including the following:

–Annuitize 25% of a retirees investable assets into a lifetime income annuity and, after several years, convert another 25% of investable assets into a new lifetime income option.

–Offer direct deposit for the lifetime payments into the persons checking account, or send the lifetime payments to several places to help the person pay regular expenses.

–Use the immediate annuity with an irrevocable beneficiary to make regular payments to a grandchild or to protect assets from irresponsible relatives.

Amy Floyd, senior director with Allstate Financial, Northbrook, Ill., offered other ideas including:

–Use the immediate annuity for education funding. That not only pays some of the costs, Floyd noted, but it also can help a student qualify for more financial aid. (That is because the parents retirement assets are not included in the financial aid calculations, she said.)

–In structuring a retirement income stream, divide assets into thirds and put each third into an immediate annuity, deferred annuity and traditional IRA, respectively. “This way, you capture growth, achieve control of portfolio, and create a comfortable income stream,” Floyd said.

–Use an immediate annuity to supplement part-time work.

Immediate annuities are not a solution for everyone, Floyd stressed. Producers need to know the customers long-term financial needs, goals and wishes, she said. Also, they should assess the risk tolerance, identify the investable assets and determine if these assets are sufficient to provide a meaningful lifetime income, she continued. Decide what is more important, she advised. Is it maximizing future income payments or preserving assets?

In addition, reps should have clients sign a document indicating they understand the annuity, their needs and related factors, Floyd said.


Reproduced from National Underwriter Edition, May 21, 2004. Copyright 2004 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.