Immediate annuities, a small but growing part of the United States fixed annuity market, accounted for just 11.1% ($7.2 billion) of estimated total sales in 2007. But this was a 16.2% increase from 2006, when their share was even smaller at 8.7%.

Single premium immediate annuities (SPIAs) were the only product type to increase sales year over year.

What’s the story behind these numbers?

To start with, SPIAs did better in some distribution channels than others. In 2007, results were down 1.6% in the independent producer channel relative to 2006, among participants in the 2007 Fixed Annuity Premium Study by Beacon Research, Evanston, Ill. This was probably due to this channel’s growing use of guaranteed minimum withdrawal benefits (GMWBs) to meet retirement income needs.

But gains in all the other channels more than compensated for this small decline. This was possible because SPIAs have broader distribution than the other fixed annuity product types. For example, independent producers sold more than 90% of indexed annuities in 2007 and had a 48% share of MVAs. Banks generated 62% of non-MVA fixed interest annuity sales.

That said, however, no single channel had a SPIA share over 36%. (See chart.)

Immediate annuities were purchased mainly to provide lifetime income in 2007. This payout type accounted for 73% of reported sales for the year. But that was not the case in all channels. For example, lifetime income products were only 44% of independent producers’ SPIA sales in 2007.

Term certain payouts were more popular in the independent producer channel because these producers tend to use term certain SPIAs to fund whole life insurance premiums. They also use term certain SPIAs to provide retirement income using the split annuity approach. (With this technique, the consumer purchases several deferred annuities and annuitizes them in succession. Payouts are timed so that accumulated values double at the end of each period.)

In banks, by comparison, almost 90% of sales were for lifetime payout products.

Surprisingly, the growth in immediate annuity sales came mainly from purchases made with after-tax dollars. Qualified retirement savings plans such as individual retirement accounts accounted for just 25% of reported SPIA sales in 2007, the lowest of any fixed annuity product type.

Even more surprising, the qualified share of immediate annuity sales has been declining since the 3rd quarter 2006 even as rollovers from employer-sponsored retirement plans have increased.

Why aren’t more retirement plan assets being rolled over into immediate annuities? This may be due, in part, to the favorable tax treatment of payouts from SPIAs purchased with non-qualified funds.

Unfortunately, most retirees don’t have large sums of money for immediate annuity purchases outside of their qualified retirement savings. That is a planning problem, because these are the very people who really need the larger checks that SPIAs can provide, unless they have traditional defined benefit pensions. It will be interesting to see whether the situation changes as more baby boomers retire.

What was behind the 2007 success of SPIAs in general? Growing demand for retirement income by an aging population appears to be the most important factor.

There are a number of products and approaches that can be used for this purpose, of course. But some of this demand translated into IA sales. This was helped by extensive positive publicity regarding the ability of these products to provide income that can’t be outlived, along with efforts by issuers and distributors to educate advisors and consumers. Some of the long-standing objections to traditional SPIAs were addressed by new products providing more flexibility and inflation protection.

In addition, the yield curve became increasingly steep in 2007. Since payouts are based on longer-term interest rates, this helped make these products more attractive relative to other alternatives.

Will there be a repeat performance in 2008? There are several reasons to doubt this will be the case. For instance, GMWBs are providing formidable competition. Also, immediate annuity payouts are dropping as interest rates decline. SPIAs are capturing a distinctly disappointing share of rollovers from retirement plans. And many believe that compensation to producers is too low and/or in need of restructuring.

But broad distribution of these products will help sustain overall sales, and most of the other factors contributing to immediate annuity success in 2007 remain significant. As more boomers reach retirement age, immediate annuity sales should continue to grow steadily–in 2008 and beyond.

Jeremy Alexander is CEO of Beacon Research, a fixed annuity data and application service provider in Evanston, Ill. His e-mail address is Jeremy@beaconresearch.net