Assets in annuities will jump to $2.9 trillion by 2012–a compound annual growth rate of 7.9%–sparked by demographic trends and product development that addresses both guaranteed income and principal protection, according to recent research by Cerulli Associates. Combined net assets of variable annuity contracts saw continued growth in 2007, with net assets at year’s end of nearly $1.5 trillion, an 8% increase over net assets in 2006, according to NAVA, the variable annuity trade group.
Qualified variable annuities, which hail from IRA rollovers or direct investments from workers who’ve maxed out their 401(k)s, are seen by asset management and insurance companies as having “very strong growth potential,” the Cerulli study notes. Qualified VAs should not be confused with the relatively new trend of including annuities as options in 401(k) plans.
The Cerulli study also found that variable annuity asset managers and insurers are optimistic about the long-term growth prospects of longevity insurance, with 43% of respondents saying longevity insurance has “significant growth potential,” notes Lisa Plotnick, associate director at Cerulli and the study’s lead author. Only 25% of the respondents Cerulli polled in 2006 were as optimistic about longevity insurance.
Annuities within 401(k) plans “work a bit differently” than longevity insurance, Plotnick says, “but the concept is the same.” Longevity insurance is basically an annuity whose payouts are deferred for a significant period of time, usually about 15 to 20 years, she explains. Because of that, “the premium amount is not necessarily very high and it accumulates over time. Should the annuitant still be alive when it comes due, that will generate a lifetime income.” Like longevity insurance, plan participants who buy an annuity within a 401(k) plan “are buying pieces of that future income, and since they are buying it at younger ages it’s less expensive because it’s based on today’s mortality rates,” she adds. In both cases, with longevity insurance and annuities in 401(k) plans, the account holder “is the not getting the benefit of the payout right away.”
A Different Way of Thinking
While study respondents were optimistic about longevity insurance’s future growth, Plotnick says that “increased acceptance and the implementation of longevity insurance solutions will be several years away” because when moving into decumulation “people have to think about annuity units instead of money accumulating–you’re not buying shares of something that’s going to accumulate, you’re buying shares of future dollars.” That’s “difficult to grasp,” she says, and this leads to marketing challenges for companies. “Companies have to strategize with communication issues about the products, the fees they charge, and how it might work with other programs the worker owns.”