Annuity FYI Blog

The new generation of fixed index annuity products offer excellent guarantees with market downside protection, and they also have lower fees.  Annuity FYI’s article “Fixed Index Annuities Getting a Fresh Look,” says that last year’s sales of $31.4 billion broke sales records for the second year in a row.  Fixed indexed annuity products are very complex and while they are an excellent investment for many people, you definitely need to research the underlying index, the formula which credits interest, the guaranteed minimum return, the participation rate, the spread fee, any cap, bonus possibilities, and the type of indexing method that will be used.

A fixed index annuity is a hybrid of a traditional fixed annuity product.  Investors are guaranteed that they won’t lose any of their original investment because they are guaranteed that their rate of return will always be above zero.  What makes fixed indexed annuities different from fixed rate of return annuities is that the rate of return varies based on a specific equities market.  You will usually have a guaranteed minimum interest rate that can increase based on the performance of the index on which the FIA is based.  FIA’s are an investment somewhere in between a fixed annuity and a variable annuity.  FINRA says that while you will have more risk and more potential return than a fixed annuity, you will have less risk and less potential return than a variable annuity.

The fixed index annuity is worth a look because the newest products have lower fees and better lifetime income guarantees than previous FIAs.  You also get the tax-deferred growth that is so popular with all annuities, shorter surrender periods, walkaway options, choice of an index, and a waiver of annuitization.  The Wharton school found that fixed index annuities have performed better than many alternative investments.  They have been competitive with many of the most popular and safest investments and have even performed better than some variable annuities and mutual funds.  FIA’s are best for investors nearing retirement who want to protect their money, especially after the past couple of market collapses.

The Insurance News Net article “Plan Ahead and Secure a Future with Retirement Annuities,” by John Mulcahy, gives some annuity basics to baby boomers looking for a secure retirement.  Retirees look to financial advisors to help them sift through all of the investment options available.   Since advisors literally have some retirees entire financial future in their hands, it is imperative that the right investment is found for each retiree.  Since the majority of people are living longer due to healthier lifestyles and medical advances, retirement annuities are an important investment.

Retirement annuities are insurance products best used as a part of one’s retirement portfolio.  They guarantee lifetime income, or for a specified period of time if you prefer, and are popular with investors looking for steady streams of money.  Annuities work much like an old traditional pension, where a lump sum payment occurs up front and money is paid out monthly, quarterly, or each year.  Some annuities even offer a lump sum payout rather than payments.  Your payments vary based on a number of factors, so it is important to be aware of annuity rates and everything else that factors into your payments.

Deferred and immediate annuities are the two basic types.  Your deferred annuity accumulates money tax-deferred until you need the payouts.  The best immediate annuities can be found through a reputable financial advisor and offer you payments as soon as you purchase the annuity.  Whether you choose a variable or fixed annuity greatly changes your terms and can make your annuity rates vastly different depending on the market.  New and improved annuities are constantly entering the marketplace, making it important to strategically plan your retirement with an expert.

According to Karen Hube’s article “Best Annuities” in Barron’s, annuities will take away the worry that many retirees have about outliving their money.  Barron’s has picked 25 of the best annuities to highlight in their article.  As Americans saw half or more of their stock portfolios disappear in the stock market collapse and volatile market of the past 3 years, those with annuities were sitting pretty with little to no worry about how they would live in retirement.  Annuity critics used to say that paying more for protection from down markets and guaranteed payments was not worthwhile, but that opinion is rapidly changing as more advisors recommend annuities to their clients.

Barron’s divided their 25 best annuities into the following 5 categories; the lifetime immediate fixed annuity, the 10-year certain immediate fixed annuity, the deferred fixed annuity with a 5-year guarantee, a capped S & P 500 indexed annuity, and a deferred variable annuity.  See the Barron’s article for the detailed top 25 list.  They used three measures to determine their best annuities.  The returns, costs, and insurance company strength were carefully researched for each deferred and immediate annuity product.  One of the reasons that longevity risk has become so much more worrisome is the increased life expectancy and retirement period for Americans.  An average retirement in 1930 lasted 3-7 years because people only lived to around 60.  Retirements now last for decades, just as traditional pensions rapidly disappear.  Annuities are the product to hedge against that longevity risk.

Some of the past worries about annuities, such as losing the money if you died early, not leaving anything to your heirs, and losing liquidity have been addressed by insurance companies with a number of rider options to give you the investment you desire.  A deferred variable annuity is the most popular of the more than 1,600 different annuity options.  Not everyone thinks that variable annuities are the best choice, some say that an immediate fixed annuity is the safest and purest annuity product.  Regardless which of the best annuities you are interested in, make sure to speak with an expert and look into exactly which product is the best for you and only you.

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.

Fixed annuity sales increased 6% in the first quarter of this year to a level of $18.9 billion.  The Annuity News Journal article; “Sales of Fixed Annuities are Making a Comeback” by Zachary Dristol, says that sales increased in all four types of annuities.  Book value annuities increased by 12%, moving to $8.6 billion in assets.  Market value adjusted annuities increased by 7% and income based annuities increased by .8%.  While there was only a minimal .2% increase in indexed annuity products, their increases over the past year or so have been so significant that the assets are still very high.

From the fourth quarter of last year to the first quarter of this year, book value annuity assets increased by 42%.  In the same time frame, annuity sales in general increased by 7%.  Beacon Research’s CEO said that increasing annuity rates during the first quarter were likely the reason for the fixed annuity sales increase.  In comparison to fixed and variable annuities, indexed annuity products lost some ground probably just due to seasonal changes.  After the financial crisis of 2008, the annuity industry worked hard to distance itself from AIG and be seen for their guaranteed retirement income again.  The top five annuity sellers in the first quarter were Western National, New York Life, Allianz, American Equity, and Aviva.