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Cerulli Looks At Challenges Ahead For Annuities

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One of the challenges for annuity sales today is what Cerulli Associates calls the “blurring of lines” between guaranteed minimum withdrawal benefit features and annuitization options.

Many variable annuities now offer both features, and some fixed indexed annuities now do so as well, and the features are looking more and more alike.

In particular, “we are starting to see some similarity between the newest GMWB features and annuitization,” says Lisa Plotnick, associate director at Boston-based Cerulli, which recently released a new report on annuity trends.

For example, she says, newer GMWBs increasingly offer “a lifetime withdrawal benefit–a stream of money you know that you can’t outlive,” as is the case with lifetime annuitization options.

In addition, some of the newer GMWBs offer “spousal benefits, which is something we see with annuitization all the time.”

And, many GMWBs now have a waiting period, of say 5 or 10 years, she says. The consumer can still get money out earlier, but the person “will get an additional benefit–a stepped-up or enhanced value–by prolonging the period before taking money out,” Plotnick says. The waiting period means the annuity can do its accumulation before paying out benefits, she continues. It’s similar to a deferred annuity that can be annuitized later.

Another blurring has occurred in benefit computation. One-third of lifetime GMWBs now base their benefit percentage on the person’s age, notes Plotnik. “It’s age-rated, just as in the annuitization tables.”

Advisors will need to become comfortable with and informed about what is actually offered in annuities with GMWBs, she says. “The products differ,” she explains, “and they can have can have many moving parts, plus tax implications.”

The new report, Cerulli Quantitative Update: Insurance 2007, targets several other annuity challenges, too.

It predicts that annuity assets will reach $2.6 trillion by 2011, up 39% from the current level. But the ratio of net sales relative to gross sales is low, it says.

In fact, less than 25% of fixed annuity and variable annuity sales are derived from money that is new to the industry, the report says, calling this a “troublesome trend.”

A related problem: Failing to monitor 1035 exchanges and not tracking net sales of all products may hinder development of adequate policy conservation plans, according to the report.

Where product positioning is concerned, the “pendulum is swinging back toward positioning annuities as an income vehicle,” says the report.

But “a strong advice element is critical to implementation of a retirement income solution,” it continues. Wholesalers already envision themselves as becoming more consultative, it allows, but many “still require guidance from their insurance companies in order to do so.”

For instance, “insurers may need to show wholesalers how to position an annuity within a package,” says Plotnick.

This is very complex, she continues. “It involves a multitude of products and services. It will take a lot of cooperation, communication and hard work, and it will be essential to involve people outside the insurance sector. Products don’t exist in a vacuum, and people don’t want to be over-weighted in insurance products.”

That is so not just for the retirement period but also for the accumulation period, she adds, especially since younger people don’t have defined benefits plans to fall back upon. “The industry will have to remember that there are younger boomers who need holistic planning too,” she says.

Developing annuity options within 401(k) plans shows some promise, the report says, noting that about 40% of firms surveyed by Cerulli in 2006 indicated they had a high likelihood of considering this strategy.

“However, the 401(k) is still widely viewed as an accumulation vehicle,” notes Plotnick. To address this, 401(k)s may need to add a feature that will enable employees to purchase “annuity units” for future income, she says.

But that too presents a challenge, because the idea of buying “annuity units” may be perplexing, especially to younger workers who may be thinking more about using 401(k)s to save for a house, Plotnick says.

Firms that offer annuities for 401(k) rollovers will also need an effective way of addressing the “double tax deferral myth,” she predicts, alluding to critics who advise against putting tax qualified money inside a tax deferred annuity. In fact, a proprietary advisor survey by Cerulli found that 48% of fee-based advisors will not consider annuities for qualified rollovers, versus 19% of commission-based advisors.

To address this, the annuity needs to be positioned for non-tax-deferred benefits, such as living benefits, death benefits and annuitization, Plotnick suggests.


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