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What’s New in Annuities

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When the final annual sales figures start rolling in from the annuity, life insurance and long-term care insurance marketplaces sometime this quarter, they’re expected to show that 2011 was a solid, if unspectacular, year for three mainstays on the insurance industry’s product platform.

Drawing from three quarters worth of 2011 sales data, experts who track the life insurance, LTCI and annuity markets say overall sales of each of those products were trending upward, portending not only a strong fourth quarter but also positive momentum for 2012. An impressive turnaround, considering how bleak things looked in certain segments of those markets just two or three years ago.

From hot products and sales channels to innovations on the product development front, here’s a look at some of the key trends the experts see fueling momentum in the annuity market in 2012.

Sales

Overall annuity sales were expected to surpass $150 billion in 2011, according to the Insured Retirement Institute, due in large part to surging demand for variable annuities (VAs), sales of which hit $8.8 billion in the third quarter of 2011, the highest level seen by IRI in 14 quarters. Year-to-date VA sales for 2011 were 18 percent higher than in 2010, totaling $118.3 billion.

Third-quarter sales of indexed annuities also surpassed those of the year-ago quarter, according to Chicago-based Beacon Research. The estimated $9 billion in indexed annuity sales during Q3 marked an increase of 0.4 percent from the same period the year prior and 7 percent from the second quarter. However, indexed annuity sales were down 1 percent for the first three quarters of the year, as were overall sales of all types of fixed annuities, including indexed and traditional fixed products.

Sweet Spots

Qualified sales of variable annuities continue to outpace non-qualified sales by a greater than a two-to-one ratio, reports LIMRA.A large percentage—70 percent of those under 70—of people buying [VAs] are using qualified funds to make their purchase,” observes Joseph Montminy, assistant vice president and head of annuity research at the Windsor, Conn.-based insurance industry organization LIMRA. With hundreds of millions of dollars in baby boomer retirement funds expected to be in play in the years ahead, VAs represent “a great opportunity and a growing opportunity” for advisors seeking to help clients find a home for those funds, he adds.

There’s no secret about what’s fueling the annuity sales surge: guaranteed lifetime benefits. More than ever, investors are willing to pay extra for lifetime income guarantees. Guaranteed lifetime income benefits are now specified with close to 90 percent of all new VA contracts, according to Montminy. The average age of those specifying such a benefit is around 60 or 61, he adds.

Similarly structured guarantee riders also are helping drive indexed annuity sales, he says. As part of an overall move to make indexed annuities more investor-friendly (with shorter surrender periods, lower caps, etc.), providers are offering more living benefit guarantees with indexed annuities. LIMRA has found, for example, that those optional guarantees are available with 87 percent of indexed products and that when they’re available, they’re elected 63 percent of the time, according to Montminy.

With annual sales projected to surpass $8 billion for the first time ever in 2011, immediate annuities are emerging as another sweet spot. Single-premium immediate annuities are finding new traction in the bank, broker-dealer and wirehouse channels, says Montminy. The age of the average SPIA buyer is 73, he adds, an indication that seniors increasingly see SPIAs as a viable tool for protecting and growing assets—sometimes in conjunction with a variable annuity bearing a living benefit of some sort.

Distribution Dynamics

Some big-name insurers—John Hancock and ING, to name two—are backing off the VA market. Meanwhile, others, such as Hartford Life and Symetra, are wading into the indexed annuity market, according to Montminy. Further downstream, he expects to see more wirehouses and big broker-dealers offering indexed annuities to compete with independent agents and advisors.

Product Development

As much as investors appear willing to pay extra for annuities with living benefits to cover their lifetime income needs, annuity providers appear just as driven to manage the risk associated with offering those guarantees more effectively. Lately that’s been the case, with insurers adjusting living benefits to put more risk, or more costs, or more investment restrictions on the investor.