Of all the misnomers that abound in the life and health insurance industry, perhaps the worst two relate to the two most basic productslife insurance and annuities.
Life insurance as we know it is not really a product designed for insuring living, but to insure for death. Likewise, life contingency annuities are really insurance against living too longi.e., “life” insurance!
The bulk of annuities being sold today are deferred annuities. They require the purchaser to transfer funds to the insurer in order to accumulate an amount for eventual distribution as periodic annuity payments.
No problem there. However, an even larger potential market exists for those with funds that already have accumulated and are continuing to accumulate in pension plans, stocks, bonds, bank accounts or mutual funds. These investors might like the ability to lock in current annuity purchase rates without the necessity to transfer investment funds to the insurer.
In the next 20 years, large numbers of people are expected to retirethe baby boomers. This generation has accumulated huge amounts of investment funds that are earmarked for use in retirement. However, the vast majority of the boomers pension plans do not provide for any type of pension payment that is guaranteed for the lifetime of the retiree. Moreover, none of their stocks, bonds, bank accounts or mutual funds can guarantee that the retiree will not outlive the funds available for retirementno matter how much money these accounts may hold.
Why not sell annuity guarantees without the accumulation feature? In essence, this would be a “term insurance” approach to retirement planning.
It is easy to envision an annuity product sold to employers, banks, mutual funds and stockbrokers that provides annuity purchase guarantees with respect to assets held in employer-sponsored pension plans, bank investment accounts, mutual fund accounts and brokerage accounts.
These types of products could help employees secure their retirements while also helping financial service organizations ensure the loyalty of their customers.
Why would anyone buy an annuity guarantee? In essence, deferred annuities provide two benefitsappreciation of accumulated contract values and guaranteed annuity purchase rates. While it is true than many deferred annuities (particularly variable annuities) offer an alphabet soup of additional features, it remains true that the main thrust of a deferred annuity are these two benefits.
While sales personnel over the past two decades may not have emphasized the feature of guaranteed annuity purchase rates, these rates are nevertheless key features of any deferred annuity contract. Thus, the industry has been selling, and its customers have been buying, guaranteed annuity purchase rates throughout the huge increase in annuity sales over the past 20 years.