Annuity FYI Blog

Near-retirees have purchased indexed annuities (also called fixed indexed annuities or equity-indexed annuities) in relatively modest but nonetheless record numbers in the past year or so. The reason: the guaranteed lifetime withdrawal benefits (GLWB) of these products are now in some cases more generous than the GLWBs offered on variable annuities.

Why? Indexed annuities, which invest mainly in bonds, are less risky than variable annuities, which invest largely in stocks. Less risk means lower hedging costs for the insurer, which (generally speaking) enables the insurer to offer a higher lifetime payout rate. Testing one particular indexed annuity GLWB with the help of an online calculator, I seemed to be able to get an extra guaranteed $2,000 a year at age 70 (after a 10-year waiting period) than I could from a typical variable annuity GLWB. (Individual products and results will undoubtedly vary).

When I wrote Annuities for Dummies, indexed annuities did not yet have GLWBs. I did not recommend indexed annuities at the time, for several reasons. First, they were not easy to understand. Second, the past returns of apparently similar products varied so much that it seemed difficult to make an informed purchase. Third, some insurers paid huge commissions to agents, which implied a smaller share of the pie for the consumer. In a few headline-grabbing instances, the high commissions also appeared to incentivize high-pressure sales. Today, for near-retirees in need of guaranteed income (but who shy away from pure income annuities), indexed annuities might be worth a fresh look.

Written by Kerry Pechter

In Maria Wood’s LifeHealthPro article “Checking Into Annuities,” the author draws a comparison between the annuity industry and the hotel industry after working in both.  Both annuities and hotels may seem like simple products at first glance, but both have many different options and their industries work hard to cater to the needs of their clients.  For people who didn’t want to pay more money for hotel amenities they didn’t use, hotels started changing their offerings and excluding some items to make rates cheaper.  There is always the option of an expensive hotel with all the amenities for those looking of course.

The annuity industry works hard to to cater to clients’ needs while maintaining their bottom line.  That is what brought about the options of fixed annuities, variable annuities, indexed annuities, and deferred versus immediate annuities.  Some annuities exist that combine long term care insurance or life insurance with an annuity product.  There are many options for funds, riders, and distribution channels when looking into the best immediate annuities and deferred annuities.

Innovation is important in both the annuity industry and the hotel industry.  With hotels, it ensures that everyone can get the exact amenities they want for the price.  The same holds true for annuity products.  If you want to pay more for GLWBs, death benefits, or other annuity riders; that is available to you.  Variable annuities are great for investors who like some risk and can handle stock market ups and downs.  Those looking to take on little to no risk are better suited for indexed annuity products.  Annuities and hotels both try to cater to the clients who use or will use them.

Written by Rachel Summit

Follow Finance Mama on Twitter http://twitter.com/#!/financemama

While the title of Robert Powell’s MarketWatch article indicates that variable annuities with GLWB’s aren’t good, it’s a bit misleading with the honest information presented in the article.  In “Variable-annuity guarantees disappoint over time,” Powell basically says that variable annuities are not right for everyone and they aren’t always a good fit, something that Annuity FYI always tries to portray.  While they aren’t everyone’s best investment, they are good for many people and for different reasons.

The main downside listed in the article is the fact that variable annuities with GLWB’s are worth less in the future after accounting for inflation.  Most investments are.  The article fails to mention the fact that you can purchase annuities that get adjusted for inflation and while they cost more, if inflation is one of your main concerns, they are worthwhile.  The author says that variable annuities are not right for people who can cover their living expenses through Social Security and pensions.  We agree wholeheartedly with that statement.  Variable annuities, and other annuities for that matter, are meant to bridge the gap between your living expenses and the money you will have coming in from those sources.  Most people don’t have traditional pensions anymore and Social Security is rarely enough off which to live, so that is where the need for annuity products comes into play.

We appreciate the fact that the author says variable annuities are right for some people, especially those without traditional pensions and those who are risk-averse.  Annuities with GLWBs have the benefit of a minimum income floor with the potential for market upside.  Without specific inflation protection, the author is right, your money will be worth less in the future.  That holds true for any investment without inflation protection.  While the title of Powell’s article makes it seem like he is saying the guarantees aren’t worthwhile, he is really saying to make sure you consider inflation when taking those guarantees into account.  And if the protection of a GLWB is what helps you relax about your future, variable annuities just might be the product for you.

Written by Rachel Summit

Follow Finance Mama on Twitter http://twitter.com/#!/financemama

The National Association for Fixed Annuities (NAFA) recently had their summit to forecast what is ahead in 2012.  This information comes from Insurance News Net’s article “2012: Industry Views from the 2011 NAFA Summit,” by Rob Billingham.  He gives a summary of six expert opinions in the industry.

Altisure Group’s Niju Viswani believes that annuities will stay strong in 2012, but they will need continuing innovation to keep up with the switch from being accumulation focused to insurance focused.  You will see more death benefit annuity products and annuities with GLWBs.  Also, insurers will have to get creative to deal with the 10/10 regulation, annuities cannot have a surrender charge greater than 10% and it cannot last longer than 10 years.

Fidelity’s Cindy McGarity thinks that 2012 will see a large focus on regulation and suitability requirements.  She believes that companies will be focused on training and carrier consolidation and says that indexed annuities should continue a steady increase.  Brian Mann of Partners Advantage says you need to move past the low interest rates and volatile markets and focus on the guaranteed lifetime income that retirees seek.  Fixed equity indexed annuities with GLWBs offer the peace of mind that many retirees want; they aren’t as worried about the interest rates.

Consultant Harry Stout says that technological advancements and strong capital management will be important focuses for insurers in 2012.  He points out that many variable annuity carriers have started selling indexed annuities as the products have developed to include death benefits and GLWBs.  Mary Ann Lacey of Underwriters Marketing Service says that while she sees an increase in annuity sales, it will be for those who adapt to changing market conditions like tying annuities to long term care insurance.  Asset Marketing Systems’ Joe Anzelone sees increased fixed annuity sales and challenges related to increased regulation.  The experts agree on most of the 2012 annuity forecast.

Written by Rachel Summit

Follow Finance Mama on Twitter http://twitter.com/#!/financemama

Many people hold cash in their portfolios, and for a good reason. When stock prices crash, they can use the cash to buy equities at bargain prices and position themselves to benefit from the rebound that’s likely to follow.

A few insurance companies are now beginning to use a related, albeit much more complex, strategy to reduce the volatility of certain “protected” investment portfolios inside the newest versions of variable annuities that have guaranteed lifetime withdrawal benefit (GLWB) riders.

Suppose that you bought a variable annuity and put your entire premium into one of these volatility-protected portfolios. Under the new strategy, the portfolio manager would keep about 10% of your investment in cash and use the cash as collateral to enter futures contracts whose values move in the opposite direction as the value of stocks. These contracts are cheap when the stock market is up; they grow in value when the market goes down. The manager can sell them and use the profits to buy stocks at bargain prices.

The prospective buyer of a variable annuity with a GLWB should welcome this practice—and also be wary of it. On the one hand, the value of a protected portfolio in shouldn’t drop as much during bear markets as an unprotected portfolio would. But its value isn’t likely to grow as much during bull markets as an unprotected portfolio would (because some of your money will be sidelined in cash and/or futures instead of stocks).

This strategy has been compared to adding airbags to a car. Like airbags, it raises the cost of the product. But it also makes the product less risky overall, which reduces the costs for the insurance company. As a customer, you will want to know how the insurer uses those savings. To reduce the price you pay for the product? To pay you more income each month during retirement? To raise its own profits?

Ohio National Life is expected to introduce a variable annuity that uses this technique early next year. Other insurers are expected to follow. You should evaluate the products carefully. They are likely to be less generous than the variable annuities with GLWBs that were sold before the global financial crisis. But the financial crisis showed that those earlier contracts were too generous. (That is, insurance companies could end up losing money on them). If insurers don’t start using strategies like futures-protected portfolios in their variable annuities, they might not be able to offer VAs with lifetime withdrawal benefits at all. And boomers would have one less tool to help them generate guaranteed income in retirement.

Written by Kerry Pechter

Follow Annuity FYI on Twitter