Even though we all know that annuities started in Roman times with a crude version of the Single Premium Immediate Annuity (SPIA), deferred income annuities (DIAs) continue to dominate annuity sales…both variable and fixed. However, the deferred annuity world is getting ready to change based on an acronym we are all familiar with: K.I.S.S. (Keep It Simple Stupid!).
Annuities have been available to consumers in the United States for over 200 years (since 1812), but the release of a recent study might have been one of the more defining moments in annuity history in my opinion. I might have been the only one to notice the announcement that I predict will be the impetus for coming changes that are inevitable based on pure demographics and pop culture trends.
Beacon Research released their Fixed Annuity Premium Study, which showed an increase in DIA sales for the fifth quarter in a row. Sales of deferred income fixed annuities were 150 percent higher than a year ago. That’s all great news, but that wasn’t the real news if you dug further.
Even though four out of five of the top sellers during the first quarter of 2013 were fixed indexed annuities, what jumped off the page to me was that a deferred income annuity (aka: longevity annuity) finished at number two. This is no one-time fluke because that same longevity annuity was the quarterly bestseller throughout 2012 as well, and it survived and flourished against and an FIA (fixed indexed annuity) onslaught of online ads, hype videos, FMO agent influence, and new carrier ownership promotion. The consistency of popularity with the longevity annuity strategy should be a wakeup call for all advisers who recommend deferred annuity solutions.
All fixed annuity categories (indexed, fixed rate, income) showed decreasing sales during the first quarter except for deferred income annuities (aka: longevity annuities). Before you say “big deal,” you need to see recognize the coming trend of simplicity that the consumer is starting to latch on to. I guarantee that 100 percent of the people who bought that deferred income (longevity) annuity completely and totally understand how the product works. If you have ever seen a longevity annuity proposal, you know that I am right on this. There are no moving parts, no multiple calculations, no fees, no “what ifs,” and absolutely no confusion. The client totally gets it. That’s impossible to imagine for all of those agents that consistently bang their heads at someone’s kitchen table trying to explain multiple index option strategies or the nuances of an income rider. We all know that sometimes feels like showing a painting to a blind person.
A simple solution
The reason that this kind of product simplicity is so important is because the masses of people trying to solve for longevity risk will increasingly demand more simplistic choices within this deferred income (longevity) annuity space. More and more annuity buyers will want a simple solution with no moving parts that they can fully explain to their six-year-old grandchild. Currently, there are less than seven carriers that offer this strategy with at least four of those carriers not catering to independent agents. That’s a little scary to say the least from a product availability standpoint, but this will change rapidly as consumers continue to demand simplicity.
Every time a prospect is looking for guaranteed income down the road or at a future date, I always show and explain income riders and longevity annuities as the two contractual ways to solve for what I call “Income Later.” More and more, I see people choosing simplicity over the more complex FIA with an income rider choice, even when the rider guarantee wins the head-to-head contractual competition. I think that this is a trend that will continue and will help facilitate the future direct annuity sales model.
It’s important to know that demographic studies have shown that the average adult processes information at the sixth-grade level. Yes, sixth grade! If you don’t believe me, turn off the TV for a month, then turn it back on and see how simplistic a newscast really is. With the tidal wave of boomers demanding contractual solutions, the annuity industry has to cater to the simplistic and realistic IQ level of the potential annuity buyer.
Before all of you in the “FIA jihad” start screaming, I am well aware of the flexibility limitations of these longevity annuities when compared to the “light switch” nature of an income rider. I get it, and this flexibility issue is the primary reason that I sell a large amount of FIAs with attached income riders. However, we all have to be realistic and transparent enough to show both choices for future income, and let the client chose which contractual solution is best for their specific situation.
Other carriers have noticed the consistent growth in popularity of the deferred income (longevity) annuity structure and are scrambling to bring similar simplistic products to the market as soon as possible. Annuity historians point to 2004 as the first longevity annuity to hit the market, with the product only becoming popular within the last few years. I predict that this new strategy will continue to grab market share from the income rider monopoly that has dominated the annuity conversation for the last few years.
These simple products are a game changer and a direct threat to agents that only offer income riders as a target-date solution. My advice is to forget about the lower commissions and embrace this new strategy as part of your overall annuity transfer of risk solutions. If you don’t, someone else will.
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