Annuity FYI Visitor Blog

Investment News‘ Darla Mercado summarizes the variable and fixed annuity sales of 2009 in her article “Banks’ annuity fee income rose, FA sales fell in ‘09 3Q.”  Through the first three quarters of last year, bank holding companies saw the fee income from their annuity sales increase.  The sale of fixed annuities however, decreased in the third quarter due to their decline in popularity through 2009.  With $2 billion in fee income from variable and fixed annuity sales during the first three quarters of 2009, banks saw a 2.5% increase from the same time frame during the previous year.  Commissions increased 4% during the third quarter, according to a report of the top 922 bank holding companies.  Overall, 71% of the largest banks accounted for almost 95% of the total annuity commissions.

Wells Fargo held the top spot even though their income was actually down from the comparable period in 2008.  In second place was JP Morgan Chase & Co who also saw a decline from 2008, albeit a small one.  Regions Financial Corp. and Bank of America Corp. saw the largest gains in annuity fee income during the three quarter time period.  Western National Life was the largest seller of fixed annuities, despite the product taking an overall decline in the third quarter.  Three companies made their way onto the top 10 list of bank annuity sellers last year.  Jackson National Life Insurance Co., ING USA, and Hartford Life Insurance Company came onto the top ten list in 7th, 8th, and 9th places.  Annuities hold strong as important financial products, despite some declines in the fixed annuity sales.

“Locking in Future Income” by Leslie Scism of the Wall Street Journal explains both the benefits and drawbacks of variable annuities.  While they help to protect your savings from losses in the stock market, you do need to be aware of both the guarantees and the costs associated with variable annuities.  They are popular because most products offer a guaranteed minimum payment which is paid in a stream over time.  It is important to note that you cannot usually withdraw your money in a lump sum, making variable annuities best for people looking for income like that you’d get from a traditional pension.

Your savings are invested into tax-advantaged funds, whether from 401k annuities transferred into a variable annuity product or from another source.  From there you’ll have an account balance of the basic funds which incorporates both your initial investment and any gains that you have accrued.  You will also have a guaranteed minimum benefit base, which insurers usually re-calculate each year and from which they base your lifetime payments.  While it is hard to find the 10% minimum increases of the past, you can still find 5% or 6% offered for at least 10 years or until your first withdrawal.

The fees associated with variable annuities are usually around 3.5% and can turn some investors off from the products entirely.  It is important to weigh those fees with the benefits though, because sometimes your reward is much more than your costs.  Since the market has extreme highs and lows, many insurers point out that the high increase years more than make up for the fees you are paying and still allow for a significant increase in your base amount.  It is important to speak with a financial adviser about variable annuities, because if you are ready to retire, immediate annuities might be a better product for you.  The Wall Street Journal lists annuityfyi.com as one of the only websites to help investors compare annuity products.

Fidelity Investments Life Insurance Co.’s variable annuities have been added to FundQuest’s offerings, according to “FundQuest adds Fidelity VA to platform” by Jessica Toonkel Marquez of Investment News.  The Personal Retirement Annuity from Fidelity is the first Fidelity variable annuity to be offered to fee-based advisers through FundQuest, or any managed-account provider.  Andrew Stavaridis, FundQuest’s VP of national accounts, says that FundQuest has two other annuity products on its platform.  He also points out that Fidelity’s Personal Retirement Annuity costs the least of the three annuities.

The total expenses fee is just .35%, low compared to the 1.37% industry average.  There is not a commission structure associated with these variable annuities either, so Fidelity believes that the product is a good fit for fee-based advisers who do not operate business commission-based.  Fee-based advisers are less likely to show interest in variable annuities, so Fidelity is working hard to educate the advisers on the benefits of variable annuities.  They have several white papers in the works, including one to explain the tax efficiency benefits relative to a managed-account setting.  Fidelity is interested in getting the annuity into more managed-account platforms as well.

In “The Four Types of Annuities” by Stephen P. Poitevint of The Post-Searchlight, Poitevant explains the four basic types of annuities.  Annuity products in general are increasing in popularity because investors want to make sure that their money lasts as long as they do.

Fixed annuities offer a guaranteed principal and interest rate with an up front purchase from an insurance company.  Fixed annuity rates vary but are currently around 4.5%.  Indexed annuities are a type of fixed annuity where your principal is guaranteed but in exchange for giving up your guaranteed interest, you receive the chance to earn added interest based on a stock market index increase.  Investors like this type of annuity because of the “floor” associated with it:  the value will not fall if the market does.

Variable annuities are based on the performance of the market and do not guarantee an interest rate, but a death benefit rider will ensure that your beneficiaries will receive at least the principal you invested, even if your account has declined in value.  There are many additional riders that can be added to your purchase with additional guarantees at a cost.  The first three types of annuities offer a stream of income starting at some point in the future, but immediate annuities begin payouts immediately.  The time frame you will receive payments is determined at the purchase and can last for any time frame up to life.  The most common type is lifetime or 20 years, which is known as “life or period certain” and immediate annuities can be either variable or fixed.

In “How to Beat Insurers At The Annuity Game,” John Girouard of Forbes gives you his best bet for getting the most out of variable annuities.  When consumers purchase a variable annuity and begin receiving payouts immediately, many times that is in the best interest of the insurance company because some of the guarantees on the growth of your principal are lost.  If the consumer waits to receive those payouts they likely will be the winner, instead of the insurance companies.  Many variable annuities have a guarantee that the income base will double in ten years, which equates to an annualized compound rate of return of 7%.  When making a 401k annuity transfer, all you have to do is leave your money for at least ten years, and you can reap great benefits.

For the consumers that did just that before the stock market rise and fall in the past 2 years, they are receiving the benefit of this guaranteed income growth.  Unfortunately for some insurance companies that had heavy investments in these types of variable annuities, they have to find a way to recover from these hard hits.  The guarantee with variable annuities is that your principal will not lose value if you haven’t started receiving income payments yet, even if the market were to collapse again.  You also retain some benefits from the highest that the market was during your investment time frame.  There are many different types of variable annuities and the products are not right for everyone.  Consumers need to understand the benefits as well as the negative aspects and weigh those with the fees.  A variable annuity can be a great way to win in the financial game.