The annuity of the future

The next time a prospect asks you why he should consider an annuity, counter by noting that annuities are one of the oldest financial planning tools in the history of the world.

Annuity stems from annua – Latin for annual stipends. They were originally created during the Roman Empire for citizens who paid a one-time fee in exchange for lifetime annual payments. While features like tax-deferred compounding and death benefits have been added, the basic idea is the same – a lifetime income guarantee in exchange for a payment. But average life expectancy for Roman Empire citizens was about 25 years according to the Journal of Population Research . Today, people enjoy retirements of that length.

Today’s list of concerns for those facing retirement are outliving one’s assets, inflation, taxes, stock market volatility, health care costs and the strength of the Social Security system. And as more companies do away with their traditional pension plan, shifting this challenge to workers, notoriously poor savers, the idea of a lifetime income stream grows in appreciation.

“The annuity of the future will have to put investors at ease by removing risk from the murky equation that is their lives,” says Bob Enright, CFP with the Burton-Enright Group in San Francisco. “A guarantee is obviously important for anyone who’s apprehensive about their future but it’s more complicated than that. They often want principal growth and protection.”

Enright, who deals largely with a high-net-worth clientele, notes people want to know things like how long can they expect their savings to last, how will it fare against inflation and how do they navigate a turbulent stock market? These factors are impacting which annuities are now brought to market. The idea that a client would never “run out of money” with an annuity has always been one of the category’s strongest selling points, but communicating this in a convincing manner can be challenging despite the appeal of perennial peace of mind.

Living-benefit guarantees that not only protect against market downsides but also lock-in gains have become commonplace. Automatic inflation adjustments and increased access to capital are relatively new features that are coming standard with many new annuities, which on a comparative basis, can be perceived as complicated by prospects. A senior advisor who can remove confusion stands a better chance of making the sale.

“New twists on annuities arrive nearly every day but for the most part they have a long way to go,” says John Riley, an advisor with Cornerstone Investment Services, LLC in Dallas. “They’re often sold based on the bells and whistles like the guarantee and access to cash but I regularly meet customers and prospects who do not understand the realities of an annuity they purchased elsewhere. There’s a lot of client misunderstanding and ambiguity to address.”

Despite any hurdles, individual annuity sales continue to charge ahead enjoying a record year in 2006 plus a record in the second quarter of 2007 according to LIMRA International. For the second quarter of 2007 annuity sales hit $66.5 billion, a 6 percent jump from the same period in 2006. For 2006 sales totaled $236.2 billion, up 9 percent from 2005. Among distribution channels, financial planners and independent broker-dealers saw fixed and variable annuity sales up 31 percent, followed by stockbrokers and career agents at 14 percent and 11 percent respectively. Banks grew variable sales 20 percent but saw a 14 percent decline in fixed sales.

To keep up with demand, annuity designers continue moving forward with client-friendly features such as asset allocation and automatic rebalancing, income protection for beneficiaries, the ability to lock-in at a “high-water mark,” and a greater capacity to choose when payments can be received. Factors such as demographics, technology and competition are helping to drive such changes.

“Longevity is one of the biggest factors shaping the future of annuities,” says Mary Fay, senior vice president and general manager, annuities with Sun Life Financial. “Past generations were expected to live 10 or 15 years in retirement. Today it can last 30 years or more. Plus current and future retirees are faced with the decline of defined benefit plans and uncertainty of Social Security. Annuity products must provide solutions that address factors like longevity, plus related issues like inflation and market risk.”

For senior advisors, insuring someone’s retirement security remains risky as demands can be staggering. Those with retirement savings of $1 million may find it difficult to enjoy the quality of life they’re accustomed to, especially once health care costs are considered. Can a new generation of annuities close the gap?

“There are many on the bubble of retirement, as well as those 5-10 years out, who are focused on benefit accumulation until their retirement,” says Frank Howell, senior vice president of sales support operations at The Penn Mutual Life Insurance Company. “They are demanding living benefits and other guarantees that can only be provided by life insurance companies. They are concerned about market volatility and outliving their income. Through annuities, they can transfer that risk to the insurance company.”

“Lifetime living benefit guarantees are driving variable annuity sales offering the ability to pursue a more growth-oriented investment strategy to and through retirement and benefit from a lifetime guaranteed income,” says Claude Methot, senior vice president and chief product officer of AXA Equitable. “In addition to securing guaranteed income for life and providing a legacy for loved ones, the new generation of annuities gives contract holders a great deal of flexibility. Americans who are at or near retirement can customize the living benefits that best match their needs and goals with various types of guarantees, options and a broad range of investment choices.”