What You Need to Know
- An annuity is an insurance product.
- Making good on an insurance product guarantee is tricky.
- The issuer needs a big enough share of the value to handle compliance and stay solvent.
Annuity critics frequently state that annuity products are just not worth it.
They say that the only ones making money from annuities are the salesperson and the issuing life insurance company.
Certain critics further state that annuity buyers are the last ones to obtain value from the product they purchase.
The critics go on to present the argument that creative individual financial advisors and money managers can develop better, more cost-effective solutions using available financial products to address consumer needs.
I believe these critics miss the mark by a wide margin.
They usually ignore the fact that annuities are an insurance product.
I don’t believe these critics fully comprehend what it takes to bring an annuity insurance product to market, attract buyers and support the selling and administrative process while at the same time complying with mandated reserving and solvency regulations.
The critics offer financial product solutions created without the comprehensive operational, actuarial, investment, marketing and solvency regulation governing and supporting annuities.
In this article I hope to shed better light on how the value generated by annuity products is shared.
The Parties to the Annuity Contract
There are normally three parties to the individual annuity contract: the annuity buyer, the issuing life insurance company and the selling agent or entity.
Here is what each party seeks to obtain from the annuity policy:
1. The Consumer/Buyer
The buyer is purchasing the annuity contract to address financial needs such as accumulating assets on a tax-advantaged basis for the time when full-time work ceases, securing income options including guaranteed lifetime income or income for certain periods of time or obtaining protections offered by the annuity contract such as payment of long-term care expenses or ease of transfer to beneficiaries at their death.
Naturally, as part of the buying process, the annuity consumer seeks the highest amount of accumulation, policy liquidity and guaranteed income payments consistent with their risk profile and time horizons.
2. The Issuing Life Insurance Company
The issuing life insurance company needs to make a profit for issuing the annuity product to maintain its regulatory capital, meet shareholder or member return needs and to generate financial results needed to maintain its financial strength ratings.
The profit needed takes into consideration the costs necessary to develop the product, financially support annuity guarantees, fund regulatory reserves and to cover all administrative and selling costs.
It is incumbent on the life insurance company to become as efficient as possible in how it manufactures annuity products in order to be as competitive in the market to attract buyers for its products.
3. The Agent/Selling Entity
All annuity sales must be made by an appropriately licensed and compliant life insurance entity.
Regardless of how the product is purchased (from a licensed individual insurance agent, an investment professional or direct from a website) these entities need revenue to cover their costs of operations, technology, marketing, advertising, selling and customer support for the annuity products they offer and to make a profit for their efforts.
These costs include the significant expenditures to comply with regulations governing the solicitation, presentation and sale of annuity products.