Although the market has made a significant recovery in recent months and interest rates are expected to rise, a low interest environment is typically a difficult time for sales of insurance products. Yet, despite persistent low rates, sales of fixed index annuities (FIAs) set numerous records in 2010.
According to LIMRA’s U.S. Individual Annuities Fourth Quarter 2010 Sales Report, index annuities had record sales for a second consecutive year, up 7 percent in 2010, to reach $32.1 billion.
Even more impressive, in the fourth quarter of 2010 alone, index annuity sales improved 17 percent over fourth quarter 2009, totaling $8.2 billion. Market share for the product reached 43 percent of fixed annuity sales in the fourth quarter of 2010, marking the first time index annuities have outperformed fixed-rate deferred annuity products (40 percent).
Why the demand?
It’s clear that demand for these products has never been higher. The question is: Why have sales been so robust in this challenging atmosphere?
One reason is that the effects of the market crisis of 2008-2009 are still top-of-mind for many consumers, making it easier for them to understand the vulnerability of a retirement savings portfolio that lacks guarantees. Although low interest rates have kept earned interest on FIAs modest for several years, seeing retirement portfolio values drop significantly and almost overnight has had a lasting impact on the way many people think about the safety of their money.
The true value of these products, however, lies not only in the accumulation phase, but also in how those monies are ultimately distributed. Savvy agents are recognizing this dynamic and delivering the message that it’s not just about accumulation — the second half of the equation for generating income in retirement is equally as important.
The FIA value proposition
As the numbers show, people are beginning to grasp the basic benefits that a FIA can provide: upside interest potential without risk of loss of principal or credited interest due to market fluctuations. They’re looking for safer ways to save that can keep a portion of their retirement assets protected to deal with issues like longevity risk, inflation and increasing health care costs.
But is it enough to simply save? A closer look at the data tells us the answer to that question is unequivocally “no.”
According to an actuarial study from the U.S. Social Security Administration, over the past 75 years, life expectancy for the average U.S. male has increased by 16 years, from just under 60 years to an average life expectancy of 75.4 years. The jump is even greater for women, moving from 63.3 years in 1935 to 80 years today.
It might seem obvious, but it’s worth stating: Longer life means a longer amount of time in retirement, which means more money is needed. The problem becomes even more pronounced when we look at the effects of inflation on purchasing power. Assuming three percent annual inflation, generating $50,000 in today’s dollar value will take more than $67,000 in 10 years, more than $90,000 in 20 years and nearly $121,400 in 30 years.
This is significant when connected with rising costs of food, housing, transportation and recreation – all things that retirees will have to consider when they stop working. But greater concern lies with health care costs. Recent stats from the U.S. Department of Labor show that seniors’ spending on healthcare increased 11.1 percent over the past 15 years (1982-2007) and that inflation in health care has risen 60 percent since 1997.
Consumers need ways to deal with increasing costs and loss of purchasing power if they want to enjoy the same standard of living in retirement. That is why it’s so important for agents to communicate the benefits of FIAs on the income side, in addition to highlighting the guarantees achieved during accumulation, which are backed by the financial strength and claims-paying ability of the issuing company.
The new FIA product
With recent advancements in product design, some FIAs offer not only the benefit of upside interest potential without risk of loss due to market fluctuations — they also provide the ability for increasing income that can keep up with inflation and protect purchasing power. This is a powerful advantage. Agents should always emphasize this during the sales process to ensure the customer understands the true value proposition of these products. As you do this, keep in mind that annuities are subject to surrender charges, which could result in a loss of principal and credited interest if the contract is surrendered prematurely.
An annuity contract issued by an insurance company is the only financial product that can guarantee someone they will never outlive their money. This concept of an “insured retirement solution” is definitely catching on, but it’s time to expand on that idea by providing more information about what annuities can do in the distribution phase.
The bottom line is that people need to be prepared for a retirement that could last 30 years or more. It’s no longer simply about getting to retirement. Agents need to help their clients plan on how to get through retirement. Once interest rates improve and people understand that FIAs can effectively address both issues, they should become an even more prominent part of Americans’ retirement portfolios.
Eric Thomes is senior vice president of Sales for Allianz Life. He currently serves on the National Association of Fixed Annuities (NAFA) Board of Directors where he was recently elected as board chair.
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