The annuity market continues to roll along. According to the LIMRA Secure Retirement Institute, total U.S. annuity sales were $177.7 billion for the first nine months of 2014, a 6 percent increase from the same period in 2013. Indexed annuity sales were particularly strong and were up 36 percent to $36 billion.
Investments only, please
Advisors with a few gray hairs will remember when variable annuities (VAs) were positioned as tax-deferred investment vehicles for clients who had maxed out their other retirement savings vehicles. The products had basic supplemental living and death benefits, but the emphasis was tax-deferred investment growth. The subsequent competition among insurers to offer more generous living benefits changed the market’s focus. Some observers, however, believe the products’ original intent is regaining momentum with the growth of investment-only VAs.
Earlier VAs’ investment options consisted primarily of sub-accounts managed by mutual fund companies with an emphasis on the major asset classes. In contrast, today’s investment-only products offer a broader range of traditional and alternative investments, giving advisors and investors more sophisticated portfolio construction options. Frank O’Connor, vice president of research and outreach with the Insured Retirement Institute in Washington, D.C., notes that investment-only VAs also generally have lower costs than products that offer living and death benefits.
These VAs’ strategies are generally outcome-oriented and can include an alternatives-based strategy, an inflation-defending strategy, and a rising interest rate-defending strategy, among others. “Those strategies often will include tax-inefficient asset classes such as alternatives and income, and those are well-positioned in the tax-deferred variable annuity,” he says.
Greg Cicotte, president of Jackson National Life Distributors in Denver, Colorado, points out that alternative investments often require accredited investor status, creating barriers to entry for less affluent investors. Investment-only VAs avoid the high-net-worth requirement, which gives more investors access to the strategies. The general idea, says Cicotte, is that the alternative investments have low correlations with the stock and bond markets and enhance overall diversification. “So, when the market goes the wrong way, a portion of your portfolio, hopefully, if they do what they’re supposed to do, goes the other way and balances out that rough ride,” he says.
The QLACs are coming
Guaranteed lifetime income for retired clients is the Holy Grail for many retirement advisors. In particular, advisors who advocate the income floor approach seek guaranteed incomes, including longevity annuities, to cover clients’ essential living expenses.
Immediate income annuities and deferred income (longevity) annuities are ideally suited for that role, but the required minimum distribution (RMD) rules hindered longevity annuities’ adoption in retirement plans. The Treasury Department’s July 2014 ruling on qualified longevity annuity contracts (QLACs) clarified how these products can be used in retirement plans to avoid RMDs. Purchases are limited: Investors can’t put more than the lesser of 25 percent of their non-Roth IRA funds or $125,000 in a QLAC. Also, the QLAC’s lifetime income distributions must begin by age 85.
Joseph Montminy, assistant vice president, LIMRA Secure Retirement Institute Annuity Research in Windsor, Connecticut, believes that the Treasury Department’s ruling could spur retirees’ interest in guaranteed lifetime income products. The QLAC market is likely to evolve slowly, he says, and probably won’t have a “huge impact on sales.” Nonetheless, QLACs will allow advisors to offer a “more complete retirement planning process,” he says.
O’Connor cites several factors that could contribute to QLACs’ adoption. First, baby boomers hold large amounts of assets in qualified plans and IRAs. As that cohort’s participation in traditional defined benefit plans declines, they are seeking lifetime income solutions, so the demographics favor QLACs. The product can also benefit insurance companies, he says. Longevity annuities have a different risk profile than, say, a VA with a living benefit. Selling QLACS can help the issuer diversify its product portfolio and risks.
Pay me later
Even before QLACs start selling in any appreciable quantity, the general category of deferred income annuities (DIAs) will continue to gain momentum, although sales are starting from a low baseline. LIMRA Secure Retirement Institute reports that DIA sales totaled $607 million in the third quarter, an increase of 21 percent from 2013. For the first nine months of the year, sales were up 35 percent to $2 billion, with the top three issuers accounting for 75 percent of sales.