Many have forecasted that single premium immediate annuities (SPIAs) will become immensely popular as baby boomers enter their retirement years and start looking for fixed income security.
This article looks at why the SPIA market may be on the cusp of blossoming. It also examines factors that may be holding the market back, especially the current low interest rate environment.
Much has been written concerning the expected growing popularity of the SPIA product. With fewer and fewer defined benefit pension plans, most retirement money has been placed in accumulation-type vehicles such as 401(k) plans.
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Upon retirement, the retiree will have many choices to make with the invested assets. One of those choices may be to purchase an SPIA that guarantees a monthly income for the life of the annuitant. The SPIA can serve as the foundation of the post-retirement investment plan, providing guaranteed income for the life of the annuitant regardless of how the other retirement assets may perform.
The market seems ready to pounce on this opportunity. Unfortunately, the insurance industry may not be ready to offer products the market will demand. Many reasons have been documented as to why SPIAs may not have “caught on” as many expected:
Current products lack flexibility for the annuitant. Life situations change, but the typical SPIA offers few options to allow the annuitant to adapt to change.
Sales compensation historically has been low. In addition to this, once the sales representative makes this sale, there is no hope of receiving another commission on these funds at some time in the future.
Some insurers are reluctant to invest heavily in the SPIA market because the profitability of this product in many companies historically has been marginal at best. The increased longevity of the U.S. population has increased the expected number of annuity payments, robbing the product of expected profits in the later years.
The good news is that solutions are in the hands of the industry through creatively addressing these issues and designing products that meet the needs of annuitants, sales representatives and carriers.