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.