Overall sales seem slow, but there are pockets of high activity
Sales of fixed immediate annuities have not increased significantly from 2003 through the first half of 2005, despite the approaching retirement of the oldest baby boomers and the rapid disappearance of defined benefit pensions.
But that is the overview. In particular, some markets actually are seeing increased immediate annuity sales.
There are several reasons for the slow overall sales numbers. From a consumer standpoint, immediate annuities are clearly a postponable purchase. Those now entering retirement often don’t think of themselves as “retired” and tend to underestimate their longevity risk. For someone in their early to mid-60s, age 85 or 90 is far into the future.
Also, immediate annuities generally represent an irrevocable commitment, which tends to be somewhat intimidating to many buyers.
In addition, many object to disappointing payouts in today’s low interest rate environment, lack of liquidity or protection against inflation, and dissipation of their legacy.
Given all that, predictions have surfaced that the long-awaited boom in fixed immediate annuity sales never will materialize. However, trends in some distribution channels suggest the opposite–that a steady increase in sales is achievable and even probable.
For the last 10 quarters, independent producers and captive agents have dominated the fixed immediate sales of participants we have studied. These two channels accounted for about 70% of sales in the first half of 2005 and 2004, up from 63% in the first half of 2003. But sales patterns of these and other channels do differ, as follows:
Independent producers. While independent producers have outsold captive agents in seven of the 10 previous quarters, sales in this channel have fluctuated considerably.
It is interesting to note that fixed immediate sales by independent producers are negatively correlated with interest rates. Perhaps these producers and their customers are reluctant to lock in a payout when rates are rising.
There also has been less effort to educate advisors in the independent producer channel. The widespread view is that these producers tend to be more familiar with how to use immediate annuities to provide retirement income and for other purposes, such as funding premiums for life insurance or long term care policies. Their success in selling fixed immediates generally has been a function of competitive payouts and long-established relationships with distributors.
Captive agents. By contrast, captive agent sales of fixed immediate annuities have increased steadily over the last 10 quarters, more than tripling from first quarter 2003 to second quarter 2004.
Captive agents tend to be specialists in permanent life insurance, which is generally a relationship-oriented sale that involves considerable trust.
It may well be that fixed immediate annuities are particularly well-suited for this channel because the sales process is closer to that of permanent life insurance than to deferred annuities, which are often sold with more of a transaction orientation.
What is more certain is that various firms and organizations have made considerable long-term efforts to educate, provide tools for, and market aggressively to captive agents and that those efforts are paying off. Also, some of the most innovative carriers have focused on this channel; these carriers have introduced new product features designed to overcome the limitations of a traditional fixed immediate.
Broker-dealers. As a group, broker-dealers accounted for about 19% of fixed immediate sales in the first half of 2005, up from 16% in first half 2004 and 18% in 2003.
Broker-dealers represent a distinct challenge as a distribution channel for sales of this product.
More than any other kind of producer, registered representatives are said to dislike the fixed immediate annuity’s lack of liquidity and flexibility, as well as loss of asset control upon annuitization.
But such negative attitudes are not inevitable. Immediate annuity sales through independent broker-dealers have increased steadily over the last 10 quarters, as more independent broker-dealers have embraced retirement income planning and more carriers have focused on educating the financial planners they serve. Independent broker-dealers’ share of fixed immediate sales has increased as a result, from a mere 2% in first half 2003 to more than 9% in first half 2005.
Banks. Banks are also said to be a difficult channel for fixed immediate annuity sales. They represented about 9% of sales in the first half of 2005 and 2004, down from 15% in first half 2003.
The sales problem here is the perceived complexity of the immediate product. Banks are thought to be more suited to selling fixed deferred annuities that are similar to certificates of deposit.
Perhaps as a result of this perception, carriers as a group have not made a concerted effort to distribute immediate annuities through banks.
But the insurance companies that have done so successfully see things differently. They have made a commitment to provide extensive education and support, investing considerable time helping bank personnel make their first immediate annuity sales. The companies that have made this investment have increased their bank sales of fixed immediate annuities, even though production through this channel has declined since the first half of 2003.
A few insurance companies have taken the lead in innovations of retirement income products in general and fixed immediate annuities in particular.
The new products tend to provide more liquidity, or a legacy for heirs, or flexibility in the size and timing of payouts, or a payout that begins many years in the future, or a payout only if needed (longevity insurance). Inflation protection also is available as a rider on many immediate annuity contracts. Some carriers have increased compensation on fixed immediate annuities and provided trailing commission options.
But it is producer support and education that emerges as the single most significant factor in increasing fixed immediate annuity sales.
Education is crucial because fixed immediate annuities can be such an important part of an overall retirement income plan. They can provide a desired level of regular income for less capital than any other alternative, and do so for the life of the annuitant. Once a basic level of income is assured, remaining assets can be allocated to higher risk/reward investments than would be prudent otherwise.
Also, fixed immediate annuities can be laddered, generating payouts based on a variety of interest rates. This approach also provides flexibility and inflation protection.
There are signs that the fixed immediate market is poised for considerable growth. The idea of income for life has been receiving extensive positive attention in the financial press.
If employers begin including them in 401(k) plans, consumers will become more familiar with fixed immediate annuities and begin discussing them with their financial advisors. This could create a demand-pull situation similar to what happened when mutual funds began to be offered as retirement plan options.
But sales of several carriers demonstrate there is already a considerable market for fixed immediate annuities. They have focused on retirement income and made a long-term investment in market research, innovation, service, support and, above all, education. For these carriers, the long-awaited boom in fixed annuities sales has arrived.
Jeremy Alexander is president and chief executive officer of Beacon Research, the Evanston, Ill., publisher of the Fixed Annuity Premium Study from which data for this article was drawn. His e-mail address is Jeremy@beaconresearch.net.
Trends in some distribution channels suggest that a steady increase in immediate annuity sales is achievable and even probable