A fixed annuity, by its very nature, lacks a certain sizzle when compared to variable annuities or equity indexed annuities.
Fixed annuities have been around since 1648 – some say since Roman times – and although they have been spiced up here and there by product innovations, they remain fixed annuities.
Nevertheless, experts on fixed and equity indexed annuities see a compelling era of innovation dawning soon.
“By the end of 2007 and into 2008 we’re going to see a surprising amount of innovation in fixed annuities,” predicts Sharon Havener, director of fixed annuity sales at Lincoln Financial Group and member of the board of the National Association for Fixed Annuities.
The stage has been set, Havener says, by the baby boomer demographic and its changing needs. “There have been complaints that the fixed products have been too conservative, slow to change. That’s going to change.”
The marketplace also is witnessing “very visible innovations like the guaranteed returns of the new (Protective Insurance) policy, or the new Integrity (Insurance) policy,” which are prime examples of fixed product innovation “being driven by the demographic,” adds NAFA executive director Kim O’Brien.
Some serious innovation has already begun, and carriers conventionally have been quick to pick up on the successful pioneering efforts of competitors.
“Carriers now are adding lots of features and benefits that get at the guaranteed minimum income benefit question, guaranteed minimum withdrawal benefits, a focus on immediate annuitization,” says Michael Ebmeier, principal of Forest Hill, Md.-based Producer’s Choice East. “You’re seeing some changes in immediate annuity policies that allow for some creative applications to craft income streams.”
Boomers necessitate changes
When it comes to fixed product innovation, the combination of carrier identification of investor needs with the demographically inevitable shift from a portfolio accumulation phase to an income distribution phase is producing innovation.
“Empirically, we are shifting into the distribution phase,” says O’Brien. “The demographics have shifted. Before we were in the accumulation phase, because all the baby boomers were accumulating. So I don’t see a (demographic) earthquake per se, but I do see it heightening in the next five to 10 years. What that emerging demographic means is a bigger market base to provide the fixed annuity insurance product. The need is burgeoning as the baby boomers are heading into their retirement years.”
Havener said one reason is that carriers in the past couple of years have taken unprecedented advantage of information technology to study their policyholders’ and prospects’ needs.
“What carriers have been doing now – particularly the large, well-established players in the United States of which I am aware – is they have purchased or embarked on studies involving the public to ascertain what their needs are,” says Ebmeier. “They really have gone about doing their homework over the last couple of years.”
Ebmeier argues that the demographics alone are not the key facts on the ground. “We have lots of older folks today and we’ve been dealing with their financial issues fairly successfully, so you think that with that group, even if it expands by a factor of 10, why couldn’t you just expand your current capabilities to match that?”
For Ebmeier, at least, the reason has to do with the most revealing study result: not the tidal wave of boomers reaching retirement age so much as the disappearance of defined benefit plans.
O’Brien agrees. “NAFA doesn’t believe in marketing to a demographic; we believe in marketing to a need. Marketing to a demographic suggests that – because you’re a 42-year-old and have two kids and a house in the suburbs – you need a fixed annuity. That is totally inaccurate. Needs analysis is what’s important.”
If it’s fixed, break it
Here are the main areas in which these changing boomer needs are yielding innovative fixed and equity-indexed annuities:
Fixed products today increasingly provide short-term security.
“It’s really in demand. It used to be that folks wanted to just put this money away and forget about it and let it be protected to sit there for however many years,” says O’Brien.
Observers see a shift down to very short surrender periods, she says, adding, “Forethought Financial Group, an emerging annuity carrier, has a three-year product, a very nice, very comfortable little product.” Four- and five-year surrenders are becoming more common, as well.
Boomers want features that permit annuitants to pass income along to heirs, no matter what.
O’Brien says, “If I lose the bet with the insurance company and die, I do not want any funds remaining to go back to (the insurer). I want the remainder to go to my loved ones. That’s a shift.
“This baby boomer group is not very tolerant of giving anything back, so their demands are quite strong. We see a huge increase in the payback annuities, where you don’t lose it; the remainder is paid out to the heirs. Protective Life has a very nice product. Essentially it is a, ‘If you don’t use it, you don’t lose it,’ kind of feature.”
Reckoning that baby boomers are opposed to delayed gratification is a good bet.
This realization might be best exemplified by the trend to offer annuitants an upfront bonus. “People want to be wooed,” O’Brien says. “A lot of products offer a bonus: If you commit to this product for ‘X’ many years, we pay you interest up front that can sit in your account. There’s a lot of those out there. Your give-up is that you’re committing for a long-term relationship, for instance, a 10 percent bonus product usually requires you to commit to 15 years.”
Products that for the first time guarantee an interest rate going forward are just starting to generate buzz.
Ebmeier particularly praised a new Integrity Life policy, a flexible premium deferred paid-up annuity, one of perhaps five on the market or in the pipeline. Integrity rolled the product out to its distributor network in mid-May.
Ebmeier explains it this way: The company “is just coming out with the first immediate annuity where you can actually say, ‘I want a guaranteed $500 a month, but I don’t want to start for another seven years. How much should I put away today?’
“Other companies have come close to that, but this is the first plan that can actually lock that down. Companies are looking at guaranteed minimum withdrawal benefits, different kind types of income payouts. They have recognized the need with their studies, and they are coming out with some of these products meet the need to the plain old ‘ability to secure.’”
Companies with similar products include Met Life, The Hartford, Presidential Insurance Co. and Aviva Life Insurance Co., says Troy Miller, Integrity Life’s national director of income products.
Paul Kruth, Integrity Life’s vice president of national sales, explains that the product makes sense if you begin thinking of it along the lines of a single premium immediate annuity. How it differs from a SPIA is a question of when it moves to the payout phase. With a SPIA, premium payments to the client can start within the first year.
“What is unique about this one is somebody who is more interested in making that payment somewhere beyond the first year,” Kruth says. “They would give us $100,000, and say, specify someday in the future for that payment to start. So say they have a retirement date that is five years ahead – you can actually tell them today the value of that monthly payment at that time.”
Asked why Integrity created the new fixed product, Kruth echoed other observers: “We are trying to take advantage of this retirement market, where more folks are moving from an accumulation phase to a distribution phase, and we think that the market is at least close – I don’t know that we’re 100 percent positive that the market is set and ready to go, but close.”
David Lewis is the founder and owner of Monegenix. He designs insurance-based financial plans, financial calculators and apps for business owners and professionals. For more information, please visit https://www.monegenix.com.