Annuity FYI Blog

Insurance companies and financial advisors are pleased that the Government Accountability Office is recommending immediate annuities to middle income families, but they don’t think that a huge sales boom is going to happen overnight.  According to Darla Mercado’s Investment News article, “Financial advisers, insurers hail GAO plug for immediate annuities,” the GAO is admitting that Social Security is flawed and retirees need to have added income to finance their retirement.  Despite the fact that immediate annuity rates are still not at an ideal level because of the financial markets, immediate annuities are still selling well and helping millions finance their retirement.  Sales of $7.6 billion in 2010 were just slightly above the sales of $7.5 billion in 2009.  A steady increase is likely to continue, especially after the GAO support.

LIMRA International expects immediate annuity sales to be around $13 billion within five years.  A big part of the increase can be attributed to immediate annuities being marketed through more distribution channels, including banks, wirehouses, and more broker-dealers.  The GAO support could help raise awareness of immediate annuities and increase sales as well.  One advisor points out that it is more important for investors to protect their money than it is to grow it, even though both are very important.  Along with recommending single premium immediate annuities to clients, he is also a fan of a deferred fixed annuity with inflation adjustment.  The government is also working with retirement plan sponsors on getting annuities included in more plans as a payout option and putting annuity payout information on plan statements.

Independent broker dealers are selling a greater percentage of the total annuities market than they did in the past, according to Linda Koco of Insurance News Net.  In the article “Independent B/Ds Gain Annuity Market Share,” it says that their individual market share has been increasing since the study was started in 2006.  IBD’s were the top distributor of variable annuities in 2010, capturing 30% of the market share compared to their 26% in 2006.  With 24% of the market share for variable annuities in 2010, career agents were the second place seller.  This was a slight increase from their 23% market share in 2006.

Although IBD’s hold a relatively small portion of the fixed annuities market, their portion has increased from 4% in 2006 to 6% of the market share.  Their fixed equity indexed annuities portion is also very small, but increased from 1% in 2006 to 2% in 2010.  The bank channel is the top competition for IBD’s in the fixed annuities market, but their share is down to 40%, from a high of 48% in 2008.  Independent agents have a strong hold on the fixed equity indexed annuities market with an 85% market share.  While that is down from their 89% market share in 2006, the IBD’s portion is miniscule in comparison.

Some of the channels lost some of their market share during the study, in addition to the independent agents decline in the fixed equity indexed annuities market.  The bank channel lost the most market share in the variable annuities market, but it isn’t that important overall since their share of that market is fairly low.  Independent agents lost the most in the fixed annuities market, but this is not a surprise since 5 year fixed annuity rates were relatively low over the period studied.  Overall, IBD’s have been squeezing into the annuities market in any way that they can over the past 5 years or so.  LIMRA found that there were approximately 75,000 IBD’s in 2009 selling annuities and making their mark in the industry.

Our series of real world scenarios continues.

A bank executive talked my 90-year-old mother-in-law into purchasing an annuity to increase her yield from a CD. Is this a mistake (considering her advanced age), or was it a good move to avoid probate in the case of her death?

Whether the annuity purchase was a wise move depends on the terms of the annuity she purchased. Call the insurance company and ask them the following questions:

1) What is her current interest rate, and what is the guaranteed minimum rate in future years? The minimum rate should be at least a guaranteed 3% return, and the company should have a strong renewal rate history if the contract is not guaranteed at a specified rate for the entire term of the contract. Ask for a copy of their renewal rate history to see how they’ve treated other policyholders in past years.

2) Is there a Market Value Adjustment (MVA), and if so, is it waived at death? Some annuity contracts contain MVAs or excess interest adjustments. These adjustments can be positive if rates are lower historically than when you purchased your contract, or the adjustments can be negative in the event that interest rates are higher than when you purchased your annuity. These MVAs can be very advantageous if the contract was properly purchased. However, at death you want to make sure if it is negative the company will waive the negative MVA. Note: most companies will pass along a positive MVA to the heirs in the event the owner passes away.

3) Are the surrender charges waived at death? Make sure her interest rate is pro-rata so that her heirs will receive 100% of the earned interest penalty free. Also, make sure that there is a nursing home bailout and a medical bailout, so that if she becomes ill and needs to be admitted to a hospital or confined to a nursing home there are no penalties.

4) Is she both the owner and the annuitant? Make sure she is. If they named an heir as an annuitant, some life insurance companies will not allow owners and annuitants over a certain age, so agents and planners and brokers will recommend that you name a younger owner or annuitant (i.e. a child) in order to qualify for the annuity. Understand that this may mean that the annuity will not be available without penalty upon the death of your mother. In other words, if your mother is not the owner and annuitant it is likely that the insurance company will not waive any surrender fees or negative MVA upon her passing.

5) What is the annual free withdrawal amount? As a rule of thumb, most insurance companies allow for a 10% free withdrawal. However, in recent years some more restrictive plans allow for low or no free withdrawals during the surrender period. At age 90, your mother-in-law may want income from her annuity to maintain her quality of life. If this is the case with you mother-in-law, you’d want an annuity with free withdrawals.

As with any investment whereby you can name beneficiaries, annuities allow you to avoid probate, which is a major benefit. Provided that there are no-surrenders at death, a negative MVA is not applicable, and her required income doesn’t exceed the free withdrawal amount, then she’s going to be just fine and this could be one of the best annuities for her.

If you want to discuss in person with an Annuity FYI Expert, please do not hesitate to contact an Annuity FYI expert for more information.

During the first quarter of this year annuity rates increased by 6%, according to the Annuity News Journal.  Henry Steelman’s article, “Annuity Rates Jump 6% in 1st Quarter,” says that this significant increase is just another reason that investors should look into annuities.  It is a great time right now to look into investing in annuities for those purchasing retirement plans and those looking for a way to finance their retirement.  Since annuity rates are high right now, it is a great time to transfer 401k annuities and other savings plans to traditional annuities.

The aging populations in America and Europe are likely to cause annuity rates to decrease again.  The article points out that it is strictly a case of supply and demand.  As people get older they are more likely to look to annuity products for a lifetime stream of income.  The more people searching for annuities, the less banks are willing to pay out in annuity rates.  MGM Advantage specializes in retirement plans and has been offering annuities throughout the recession.  Their director forecasts a decline in annuity rates and suggests looking into alternate retirement options if you don’t plan on taking advantage of increased annuity rates now.  Equity linked CDs and certain mutual funds can be good for investors as well.  Speak with an expert to find out if annuities are the right investment for your future.

The Kehrer-Jackson Monthly Bank Annuity Sales Survey showed a continuing increase in sales of variable annuities last year.  Insurance News Net’s article “Recovery in the Works for VAs in Banks?” by Kehrer-LIMRA summarized the annuity findings.  Fixed annuity sales remained stable, while sales of variable annuities increased each month in the fourth quarter.  There was a 4% increase in combined sales of fixed and variable annuities through banks, for a total of $2.7 billion.  That was around the same increase that the products had in November, but 7% above December of 2009.  Since the low sales number in January of 2010, total annuity sales have increased 24%.

Sales of variable annuities were $1.6 billion in December of 2010, a 21% year over year increase and a 6% increase from November.  This was the second straight month with an increase and brought the sales back up to the levels from springtime of last year.  The gap between sales of variable and fixed annuities is widening by the month.  Back in December of 2009, $.84 in variable annuities was sold for every dollar of fixed annuities.  After a complete turnaround, there is now $1.48 in variable annuities sold for every dollar of fixed annuities.

Fixed annuity sales in banks were relatively stable in the fourth quarter of 2010, staying around $1.1 billion.  The December sales of $1.08 billion were just a slight increase from November’s sales of $1.07 billion.  Fixed annuity rates and 5-year CD rates are being closely monitored because of the spread.  It is now at 34 basis points, with fixed annuities being above CD’s with five year time-frames.  Kehrer-LIMRA is expecting a sales increase because of this larger spread.  Whether looking at fixed or variable annuities, it is best to consult an expert for your individual situation.