Annuity FYI Blog

Income annuity database CANNEX tracks advisor searches of single premium income annuities, according to Linda Koco of Annuity News.  In the Insurance News Net article, “Advisors eyeball SPIAs valued at over $200,000,” Koco questions why the amounts purchased are so much different than those researched.  On average, these immediate annuities have premiums around $100,000, even though the amount of advisors’ searches was $231,000.  The yearly average maintained the quarterly averages, although the 3rd and 4th quarter numbers were less than those in the first two quarters.

There are good reasons that the searches are for more than double the actual annuity applications though.  First of all, many advisors and clients are putting money into more than one annuity to spread out risk and to stay within state minimum guarantys.  Even though a $200,000 annuity may be recommended to cover a client’s living expenses, that doesn’t mean that each individual annuity application will be for $200,000 or more.  So the advisor is searching for the total amount that their client will need in an annuity purchase, a search that averages $231,000, but they aren’t buying one annuity with that entire amount.

The average age of clients for which the searches were run is 70, 69 for males and 71 for females.  With $200,000 to purchase an immediate annuity, a 69 year old male would receive approximately $1,500 for their monthly expenses.  Almost all of the searches run were for immediate annuities, a full 90% of them.  Clients plan to use non-qualified money from sources like inheritances in savings and investments to purchase their annuity.  Single life annuities accounted for 61% of the searches, joint life accounted for 19%, and period certain accounted for 20%.

According to the IRI, overall annuity account balances are much lower than this report indicates.  Including fixed and variable annuities, 75% of the balances are under $100,000 and 33% are under $20,000.  So even though searches are well over $231,000 and average application amounts are $100,000, annuity balances appear to be significantly less.

Written by Rachel Summit

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Variable annuities were introduced to Asia in the late 1990′s and have been popular ever since.  American growth of variable annuities peaked in 2007 before the financial crisis took it down to lower levels.  According to Insurance News Net’s “After financial crisis, Asia emerges as variable annuity growth area,” there is a still a lot of growth potential in Asia even as the American markets are increasing again.  Rebecca Ng of A.M. Best Company wrote this article about the potential for variable annuity growth in Asia and says that China looks to be the top spot for this growth.

China’s Insurance Regulatory Commission has piloted a program for variable annuities that gives insurers great opportunities in the business.  The potential for a 100% return with variable annuities makes them very popular with policyholders and a bit riskier for insurers.  Chinese capital markets need to make sure they can hedge variable annuity products, especially some of the guarantees offered to policyholders.  McKinsey & Co consultants believe that insurers will be able to do this with proper hedging, reinsurance, and continuous improvement with product design.

After a few years of decreasing in North American sales, variable annuities have seen double digit growth and the amount of assets under management has passed the high in 2007 again.  In 1999, variable annuities were introduced in Japan and sales grew fast almost immediately.  Introductions followed in other areas of Asia.  While the financial crisis did take some insurers out of the variable annuity market in Asia, there has been a renewed interest in China especially after the pilot program from the CIRC.  Variable annuities are making a global comeback after a rough few years.

A.M. Best has put together a special report highlighting the life and annuity industry’s 2011 happenings and forecasting those for 2012.  They released a press release summarizing their findings entitled “A.M. Best Special Report: U.S. Life/Annuity Insurers Shifting Gears in Volatile Economic Environment.  Even with a plethora of large economic challenges in 2011, the life and annuity industry made it through the battle with little consequences and even had some fixed-income portfolio gains.  The industry maintained good regulatory capital and operating earnings.  Careful liquidity and capital management allowed the industry to improve the fundamentals of their balance sheets.

Low interest rates are definitely affecting the industry’s earnings, so they have to adapt.  Annuity rates and others affected by interest rates will most likely remain low through 2014.  Although the rate of growth will be slower, A.M. Best does expect positive earnings to continue.  Those life and annuity companies whose earnings are not as tied to interest rates and equity markets will likely maintain better results that those who are.  Product lines that are changed by the equity markets are increasing the hedging costs and reserve needs at companies.  Insurance companies have taken different approaches to the risk with some closely monitoring more risk and others paring down on risky asset classes.

Some insurance companies have slightly changed their variable annuity products to stay in the market, while a few have left variable annuities behind.  Others are moving away from fixed annuities and group medical and long term care insurance.  Companies who are re-emphasizing whole life insurance are more favorably viewed by A.M. Best.  A new deferred acquisition cost accounting system will impact shareholders’ equity as it’s introduced, but the changes will be manageable.  Overall, A.M. Best seems to believe in the life and annuity industry and their future success, despite difficulties in the market.

Written by Rachel Summit

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The cost of long term care can be upwards of $100,000 a year and many Americans have not planned ahead by purchasing long term care insurance.  This information comes from the Pittsburgh Post-Gazette’s article “Elder Law: Annuity valuable option in a crisis,” by Julian Gray and Frank Petrich.  If you don’t have that insurance, you will likely have to spend down all of your money to near poverty levels in order to receive Medicaid benefits for long term care in nursing home facilities.  But there is another way to become eligible for Medicaid assistance.  Purchasing a Medicaid compliant annuity makes those funds exempt from being counted towards your Medicaid eligibility.

Immediate annuities can shelter your financial resources so that the spouse of someone in long term care still has money off which they can live.  By following the proper protocol and ensuring that your annuity purchase is Medicaid compliant, your countable or non-exempt money will become noncountable or exempt.  There have been many lawsuits both federally and in Pennsylvania regarding the correct way to convert countable money to noncountable, so it is crucial to find a legal and financial expert to help you with this annuity purchase.

The Deficit Reduction Act of 2005 made it easier to determine the annuity rules in this particular situation, but everything was not clarified and questions remained.  The criteria are very specific for using immediate annuities to make your money exempt, and you must make sure that your particular annuity meets each and every criteria.  But having this option has saved many elderly people from living at the poverty line as they pay for their spouse to be cared for in a long term care facility.  This is an option so that they don’t have to spend down all of their money in order to qualify for Medicaid coverage.  This annuity purchase isn’t right for everyone, but many elderly people facing financial crises can be helped with an annuity.

Written by Rachel Summit

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A recent article on Cincinnati. com by insurance agent J. Brendan Ryan gives some added insight into the importance of using annuities with longevity insurance.  In “Longevity insurance may be for you,” we are reminded of all of the risks associated with retirement, not the least of which is longevity risk.  While many people don’t worry about living too long, there is a real danger of living longer than your money will last.  Annuities are a great way to grow money tax-deferred and a lot of people use them for that purpose.  But they are also an important way to receive retirement income that you cannot outlive.

Whether you purchase an immediate annuity to receive income right away or defer your annuity until some point in the future, you have the option of receiving income over the rest of your lifetime.  Your payout is based on a number of factors like age and life expectancy.  For those who live longer than their life expectancy, they have gotten a “mortality gain.”  If you die sooner than expected, it is a “mortality loss.”  There is a lot of focus given to the worry that one will die suddenly and “lose” the money put into their annuity.  Thinking of annuities as longevity insurance is a good way to remember why they are so important.  You use insurance to protect you in case you total your car or your house burns down.  If those things don’t happen, you aren”t upset that you protected yourself just in case.  Think of annuities the same way; if you don’t live longer than your life expectancy, you at least were protected just in case you had.

Longevity insurance is a new product and not many annuity suppliers know much about it.  It is, in essence, an annuity.  You make a lump sum payment and your money is held for a specified period of time.  If you are alive at that point in the future, you will receive annuity payments for the rest of your life.  In the riskiest form, you would not receive any refund if you died before the specified date.  But by taking smaller payments in the future, you could add death benefits or make your annuity joint with a spouse.  It’s up to you to decide what type of annuity you want with your longevity insurance.

Written by Rachel Summit

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