While lifetime income or immediate annuities have been around for years, insurance companies and some advisors are now finding they serve the profitable and ever-growing niche of financial planning for those who anticipate a much longer retirement horizon than their grandparents. The product exchanges an upfront investment with the guarantee of a regular paycheck as long as the owner lives, which helps ease investors’ fears of outliving their money.
Given the social and demographic trends, the concept of a guaranteed lifetime income is growing in popularity, says John Meyer, senior VP in charge of New York Life Insurance Co.’s annuity department. However, the market for these products has not as yet matched the enthusiasm for them generated by their creators–and some advisors.
Sales of fixed immediate annuities grew to $5.3 billion in 2004 from $4.8 billion in 2003, and have increased 8% in the first half of 2005 compared to the same year-ago period, according to LIMRA International, which tracks insurance statistics.
While more and more people are becoming more comfortable with the immediate annuity, interest in buying the product is highest among those clients who’ve “voiced a real concern that they are risk-adverse and they want to make sure they have money coming in” when they are older, says Mark Ferris, a financial planner with Yankee Cents Financial Services in Old Saybrook, Connecticut.
Ferris, who sells American Skandia’s immediate annuities, says he does have to address the risk of inflation when recommending immediate annuities–money will be worth less in 10 to 15 years if there is no change in interest rates. To hedge that risk, Ferris sells variable immediate annuities, which, because of market unease since 2000, have been sold in far fewer amounts than standard fixed immediate annuities, according to LIMRA research.
New York Life’s branded LifeStages Lifetime Income Annuity reached $292 million in sales in 2004–up 154% from 2003–and total sales are up 40% through August, outpacing an industry-wide increase of only about 3%. But the mutual insurer worked hard to get past some investors’ initial reluctance to purchase immediate annuities.
“When we were designing this [LifeStages annuity] we did some consumer research to see why some of these products were not being sold more frequently,” says Meyer. New York Life found three major concerns. First, traditional immediate annuities don’t have much liquidity. Second, many individuals want to leave something to their heirs, and not sock all their money away into a product that in its pure form leaves no estate. Third, there’s the possibility of higher inflation.
Thus, New York Life went to work designing a product that has options, such as a withdrawal feature of up to 30% of the present value of remaining payments without penalty on the fifth, 10th or 15th anniversary of the annuity, and a feature that allows policyholders two chances to accelerate payments during the time of the contract. For instance, instead of $500 a month, the policyholder could receive $3,000 today and stop payments for the next five months. To guard against inflation, a policyholder can increase the income payment amounts. Also there are options of death benefits at 25% of premium or at 50% of premium no matter how long the policyholder has been receiving income in exchange for a lower monthly payment/income on the LifeStages annuity.
Policyholders pay in expenses or lower payments for more bells and whistles on the product, however. For example, the added refund features drop the payment stream by 10% to 20% in some immediate annuity products, says Michael Kitces, director of financial planning at Pinnacle Advisory Group in Columbia, Maryland. “It’s a good product for the right fit,” Kitces acknowledges. But it is an irrevocable decision to basically “surrender hundreds of thousands of dollars for a stream of income later,” he notes.