With an increasing number of new retirees, fewer traditional pensions and people living longer, the income annuity market has been poised for growth for many years. However, sales have yet to take off.
One key reason is that the products are not widely recommended by independent advisors.
The reasons for this may relate to compensation, liquidity or perceived value of income annuities. Still, some organizations are making progress in increasing income annuity sales. Here are some suggestions, based on their efforts. They fall into two areas–addressing perception vs. reality, and looking to new innovations and beyond.
Concerning perceptions, there are several issues to examine.
One is the perception that income annuities pay low commissions. The products do pay about half the percentage of commission that deferred annuities pay. However, the average income annuity sale is more than twice that of a deferred annuity, so the reality is, the advisor can expect to receive a larger average commission check from the income annuity sale.
Lack of liquidity is another issue. Most immediate annuities are considered irrevocable. However, the reality is that several insurance companies now offer, by contract, living “exit” strategies. These strategies allow an annuity owner to commute (surrender) part or all of the income annuity as need arises, or under specific contractual conditions. Income annuities with death benefits offer similar commutation features to beneficiaries.
Perceived value is a recurrent issue. The advisor needs to ask, is there something better than an income annuity that will generate similar after-tax cash flow?
The reality is that an income annuity provides “certainty” in a world of maybes. As life expectancy continues to increase, the selection of a single life or joint life income annuity assures annuitants an income they cannot outlive. When a client asks about the “internal rate of return” of the proposed life income annuity, the advisor should ask the client how long he or she plans to live. Remember, these products have an assumed interest rate based on the annuitant’s life expectancy; however, the rate will increase if the annuitant lives beyond his or her projected life expectancy.
Concern about inflation does come up and it is a very real issue. The advisor needs to point out that, to protect “purchasing power,” the client can add a cost of living inflation rider. This rider increases annuity payments over time. Variable annuities with floor payments have been around for some time, prompting the relatively new fixed income annuity with a floor and an equity index account kicker as a way to offset the effects of inflation.
What about tax concerns? If that is an issue for the client, consider using a split annuity (part income annuity and deferred annuity) to create tax-advantaged cash flow for five to 10 years or more.
What about IRA Required Minimum Distributions? Income annuities are ideal for RMD simplicity. When a single life or joint life income annuity, or single or joint life income annuity with period certain is used for RMD, using IRS guidelines, annual calculations are not needed. That’s because the income annuity payments are deemed to meet RMD requirements.