When annuities first entered the American retirement-planning arena, their popularity grew largely based on their tax-deferral and income-guarantee features. The death benefit was another standard feature that helped annuities win fans. Today, the annuity evolution continues as carriers introduce new features and riders in response to changing consumer demands.

Macrocosmic factors such as longevity risk, inflation, a questionable Social Security system and the individual’s responsibility to prepare for their own retirement have forced annuity providers to come out swinging with what seems to be an endlessly innovative product lineup. And while these new features can help individuals better navigate retirement and mitigate risk, they have also at times created climates of misunderstanding for which the industry has been frequently criticized.

“The annuity industry has always been in a state of evolution,” says Harley Kaplan, CFP in Sherborn, Mass. “The industry has had some issues to deal with. While it’s come a long way there is still room for improvement.” Kaplan cites the products’ relative complexity along with a failure on the part of providers to adequately educate advisors regarding annuity features, as two big hurdles for the industry. “They’ve not shown the ability to position annuities as strategic investments,” charges Kaplan. “Annuities have a lot of benefits but the providers need to do a better job explaining what they are and how to use them to help individuals prepare for a long-term retirement.” Says advisor Michael Salley of Salley Wealth Advisors Group in Summerville, S.C., “I’d like to see a lower fee structure and ways to make it simpler to communicate the potential benefits of annuities. Annuities make up a large part of my practice because they can give each client exposure to nearly every asset class for the long term, plus the benefit of tax deferral. These can be critical elements of wealth building.”

While they may not be perfect, statistics show more and more people are turning to annuities. U.S. individual annuity sales improved 4 percent to reach $68.4 billion in the second quarter of 2008, according to LIMRA. Sales for the first half of 2008 were up 7 percent over the first half of 2007, reaching $131.9 billion. The industry’s response to this increased interest and its innovation in the face of changing consumer demands are the forces behind the evolution of annuities, and this trend shows no sign of slowing down.

“The questions are: What are the clients’ needs and what can an annuity provide?” says David Byrnes, executive vice president and director of sales for Sun Life Financial Distributors. Factors driving the changes in annuities, according to Byrnes, include an increase in longevity, the need to offset inflation while providing income, and a competitive reaction among providers. “Features like the death benefit and tax-deferred accumulation are not the core reasons behind an annuity purchase. It’s longevity insurance.”

According to Laurence Greenberg, president and CEO of Jefferson National, which recently introduced the first variable annuity with a flat insurance fee, “Annuity products today are increasingly being aimed at specific markets. Historically they had been created with a broad appeal in mind. Needs are not universal. The benefits have been all about the riders and this has changed the nature of annuities. As 76 million boomers approach retirement over the next two decades, tax deferral is vital for helping them confront two urgent needs: how to save more and how to make it last a lifetime.”

The fear of outliving one’s income and assets is becoming a reality for many older Americans. Yet many are still determined to live the retirement of their dreams. “There can also be a psychological advantage with an annuity,” says Salley. “Many complain about surrender charges but these can keep the client invested for the long term, which, over time, generally works to their benefit. Further, it relieves the variable annuity manager of having to liquidate securities during market turbulence. That’s often not the case for the average mutual fund manager.”

According to a recent MetLife survey, “Feeling the Economic Pinch, A Poll of Americans 60-Plus,” 73 percent of respondents said they would not postpone their planned retirement date because of the current economy. Only 16 percent of respondents are withdrawing or will withdraw more from their retirement funds than they originally planned. “While there have been serious economic downturns in the past, it is clear that this group of people over 60 feel particularly vulnerable during this time of their lives,” says Sandra Timmermann, director of the MetLife Mature Market Institute. “Yet, it appears that they are not, at this point, changing their longer range retirement plans.” Jerome Golden, president of the Income Management Strategies Division of MassMutual, agrees. “There’s a growing demand for guarantees and security, particularly among retirees and near-retirees. They want to know that there will be an effective way to convert their nest eggs into solutions that are going to help them live securely in retirement.”

Retirement today has become a multidimensional issue. Inflation, especially in terms of the rising cost of health care, has become intertwined with longer life spans. Subsequently, the drop in home values has left many retirees and pre-retirees wondering how they will afford retirement. Senior advisors may need to present to clients the negative but realistic aspects of escalating inflation combined with the likelihood of a 30-year retirement. When the prospects for Social Security are added to the equation, questions begin to arise, such as, Will I have enough money? “The rising cost of health care and other essentials has people concerned about outliving their assets or experiencing a decline in their standard of living,” says Tom Buckingham, senior vice president at The Phoenix. For some, the prescription may be a variable annuity combined with an optional living benefit rider to help protect retirement assets against longevity and inflation.

In many cases, it is the attitude of the retirees that needs to change in order to better prepare for their financial futures. “One of the best ways to prepare more for retirement is to save more,” says Greenberg. Tax deferral can be a great benefit in this regard. Half of all baby boomers are 14 years away from the traditional retirement age and should focus on savings accumulation according to Jefferson National’s recently released white paper, “Increasing Retirement Income through the Power of Tax Deferral,” which concludes that retirement income is “largely a function of savings.”

America’s retirement landscape continues to change and evolve. While the annuity industry has been anticipating the problem of increased longevity as the tsunami of baby boomers reach retirement age, unexpected issues such as the return of inflation and a housing market downturn have made many view their forthcoming golden years with a new level of sobriety. In many cases, this has necessitated a need for prudent, long-term planning and a massive opportunity for advisors.