The alternative products are also usually positioned as being better in that they have no up-front commission being paid to the selling financial professional but come with lifetime annual fees. In my view, from a purely economic standpoint, consumers will almost always pay more in fees over the life of the investment than up-front commissions paid as part of the annuity sale, as the money put into the annuities will remain invested for the medium to long-term term before being accessed. I believe this mass media negativity is missing this point for the vast majority of consumers.
The intrinsic value proposition of annuity products remains strong — tax deferral, minimum guaranteed returns for fixed products, guaranteed lifetime income, principal protection options, state-based solvency regulation, a new and innovative generation of added supplemental benefits (e.g., income, long-term care benefits, terminal illness, and nursing home confinement riders) and the potential for a fixed (declared rate or indexed), buffered or variable based earnings depending on the product purchased.
The critics also point out the complexity of the products offered. This criticism is valid as the existing sales process of disclosures, illustrations, the myriad of recently introduced indexing methodologies and regulatory forms is quite overwhelming for all parties involved in the sale. Much can be done to streamline and simplify this process.
Remember, we need to understand that annuity products are not high in cholesterol, nor are they fattening, but they can help provide financial security and peace of mind if sold and positioned properly.
Economic and Demographic Considerations
There are several key economic and demographic reasons at play in our world today that support increased education about the value of annuity products. These reasons are why annuities should be front and center on the radar screen of today’s consumers as they save and invest for their lengthening financial lives. These include:
- Ever longer life expectancies as medical and technological advances work together to increase expected lifespans. These advances increase longevity risk.
- Financial risks that consumers can anticipate as they age, including those related to changing interest rates, sequence of returns risk and equity market volatility.
- The need for guarantees from financially strong parties to help mitigate financial risks.
- Possible changes to Social Security, Medicare and Medicaid government programs that may generate higher expected expenses or lower incomes in later life.
- The reported lack of retirement readiness many people face with savings disclosed at very low per family amounts with the need to build greater retirement savings.
- Helping families with retirement savings to create protected income streams that will live as long as they do.
- Assistance to retiring individuals with the change in their financial focus from accumulating assets to effective ways to distribute assets to fund living costs.
- The tax benefits and restrictions of annuity products. These products have definitive tax advantages including tax deferral that need to be stressed given likely higher future rates. At the same time we should educate consumers on the products’ tax restrictions.
What Financial Professionals Can Do
Much has been written about the need for increased financial literacy but not enough has been done. My belief is that each financial professional should contribute time or financial resources to support industry efforts targeted at consumer financial and annuity education.
At the same time they should devote some portion of their time with clients and prospects to educating about the need to have at least some portion of their retirement income in fully or partially protected sources.
To sum it all up: We all need to blow the annuity horn much louder than we have. While the product is not right for everyone, once it is properly explained, it is clear that today’s products can provide necessary and cost effective risk protections for a large number of aging consumers.
— Connect with ThinkAdvisor Life/Health on Facebook, LinkedIn and Twitter.
Harry N. Stout has been the president of Fidelity & Guaranty Life, deputy chief executive of Old Mutual Financial Network, and managing director of Insurance Insight Group. He is also the author of The FinancialVerse personal finance books and of a new book, Today’s Annuities — A Tool to Create Protected Lifetime Income.