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

There have been some new annuity products introduced this year, but they have not been in abundance and agents are looking for more to offer their clients.  Insurance News Net’s Linda Koco estimates that we may have to wait a bit longer in the article “2012 Could Be Rebuilding Year for Annuities.”  The article summarizes what happened this past year in the new annuity market and what is expected to happen in 2012.

The traditional deferred fixed annuity didn’t get much love this year, partly due to low interest rates and partly due to insurers worrying about guaranteeing any fixed rate at all.  Many annuity carriers brought new tools for their sellers and annuity clients to use, including online reporting and comparison tools.  While there were some new variable annuities introduced this year, they weren’t as exciting as in years past.  What is important in regards to the variable annuities is the focus on new GLB riders.  Some advisors say that clients will only purchase annuities with these guarantees in place.

Indexed annuity products are hotter than ever, boosted by large product development releases this year.  Even this month saw two new indexed annuity products, one from Hartford and one from Genworth.  Income products, including annuities, riders, and options are hot on the development list.  There were also some new immediate annuities this year as companies look to offer  more options to retirees.  So while this year wasn’t particularly exciting when it came to new product development, there are some new things out there and 2012 may be a more exciting year for annuity product development.

Written by Rachel Summit

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There is no question that Dave Ramsey has some great financial advice and has helped countless people live debt free and financially secure lives.  But his view on annuities is too far-fetched; just because annuities aren’t best for some people he assumes they aren’t good for anyone.  Annuity Think Tank published a great rebuttal to Dave Ramsey’s sweeping generalization of fixed and fixed equity indexed annuities.  Dave Ramsey says that he doesn’t have any annuities and because of this, no one should buy annuities.  Every reputable annuity company and insurer out there is quick to say that annuities are not the best product for everyone, but they are a great product for many people.

Ramsey says that you simply should never buy a fixed annuity.  Annuity Think Tank gave a stellar example of two investors who had $100,000 to invest from 2000 through today.  The investor who had their money in an S & P 500 index from October 2000 through October of this year would have $90,000 right now.  That scenario doesn’t sound very good.  But the investor who bought a 10-year fixed annuity in 2000, with 7% guarantees which were the norm, would have $196,000 right now.  That sounds a lot better to me.  While you may not get the highest returns in a really up market with annuities, you are protected from losing money in a down market and I think that is worth a lot.

In regards to fixed equity indexed annuities, Ramsey says that no one should purchase them and those who want to invest in an index should invest directly in that index.  That argument was already refuted with the above example of investors who would have $90,000 or $196,000 for their invested $100,000 twelve years later.  We agree that annuities are not the best product for every single person.  But we strongly disagree with Dave Ramsey, who says they are not the right product for anyone at all.  We have to agree with Annuity Think Tank on this one.

Written by Rachel Summit

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I recently blogged about the psychology of annuities and why more people aren’t using this product to receive guaranteed income for the rest of their life.  Sheryl Moore from Insurance News Net read the same article as I did, “Insights into the Annuity Puzzle,” and had her own theory about why more people don’t turn to annuities in retirement.  Since the original article didn’t have much of a conclusion to the puzzle, Moore tries to come to a better understanding in her “How to Escape ‘Annuicide’.”

She says that in order to guarantee your retirement income you need to either buy an immediate annuity or annuitize a deferred annuity.  With 1/5 of Americans realizing that they will never be able to retire and a tripling of the over-90 population in the last 3 decades, you’d think more people would turn to annuities that will offer income over their lifetime.  Moore points out that only 2% of annuity contracts annuitize to guarantee a lifetime income stream and immediate annuities don’t account for a large portion of annuity sales.  She has 3 reasons why she believes this is the case.

The first reason is that people who buy annuities don’t want to lose all of their flexibility, something Moore refers to as ‘annuicide’, where they are locked into their choice.  Secondly, with immediate annuities or annuitized deferred annuities, agents lose control of the assets due to the inflexibility and they cannot change up the investment.  The third reason is that commissions are only 3% on these annuities, compared with 6.6% on some indexed annuities and agents just don’t sell them as much.  Moore believes the solution to these three issues is the use of GLWB’s with a fixed equity indexed annuity rather than the traditional use with a variable annuity.  As of this past quarter, more than half of indexed annuities had an attached GLWB, so this seems to be a good solution.

Written by Rachel Summit

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I found an Insurance News Net article listing three very basic questions to ask before purchasing an annuity.  In Maureen McLaughlin’s “Guide Clients Down the Right Annuity-Route,” she says that the questions are just as important for advisors as they are for those purchasing the annuity.  It is crucial for clients to trust their annuity advisors and get the most reliable and understandable information from them.  Understanding annuities can be a time-consuming endeavor, but with the right expert advice it doesn’t have to be difficult.

First of all, you’ll want to decide the type of annuity that will work best for you.  Do you want to receive payments right away with an immediate annuity or use a deferred annuity to grow money tax deferred?  You also have the choice of a fixed annuity or one with variable annuity rates.  Make sure that you know why you are purchasing an annuity product in the first place.  It’s important for advisors to explain all of the benefits offered by annuities to clients and potential clients.  You’ve got to have a long term investment and financial plan in mind.

The last question to answer, and the one that frightens many clients, regards the fees associated with annuities.  Be up front with your clients if you are an advisor; if you are the client make sure to ask for all of the fees to be spelled out for you.  In addition to your annuity rates comparison, you’ll want to compare the fees associated with variable annuities, fixed annuities, and immediate annuities.  By knowing any product fees up front, you can better plan your retirement and use your annuity for a lifetime income stream.

Written by Rachel Summit

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