Annuity FYI Blog

Recently I read an authoritative research study in which psychologists asked half the people if they thought they would live to age 85 (a positive “framing” of the question) and asked the other half if they thought they would die by age 85 (a negative framing).

The first group said yes more often than the second group said no, so the researchers concluded that people are more optimistic about living longer than if they are quizzed about their life expectancy in a positive rather than negative way.

Since they expected to live longer, the first group was also, on average, relatively more willing to consider buying a single-premium, single-life-only immediate life annuity (an irrevocable contract that converts a lump sum into a guaranteed income stream for one person for life) than the second group.

That was no big surprise. Everyone (especially the actuaries who price annuities for insurance companies) knows that healthy people with parents or grandparents who lived to age 95 or 100 are much more likely to buy annuities than people who smoke or have short-lived ancestors. Indeed, this fact tends to make life-annuity prices about 10% higher than if a mix of healthy and sick people bought them.

But what irked me was that the researchers, like the researchers in most annuity studies, asked the participants if they would buy a single life-only annuity. That’s the kind of annuity where if you get “hit by a bus” only “a day after buying your annuity” the insurance company “gets all your money.”

Such annuities exist-but hardly anyone buys them. Many if not most life annuity buyers-and I hear this from the folks at New York Life, the biggest private seller of immediate annuities, and from TIAA-CREF, the biggest non-profit seller of annuities-hedge their bets by adding a “period certain” or a “cash refund” or “joint and survivor” option to their contract.

Under a “life with period certain” contract, you or your beneficiary get monthly payments for life or for either five, 10, 15 or 20 years-whichever is longer. If you do the math, you’ll discover that 15 years of guaranteed payments will ensure you (or your beneficiary) a return of principal. So will a “cash refund” contract. And a joint-and-survivor option ensures that
income will last as long as either of two people (usually husband and wife) is living.

Unfortunately, journalists as well as researchers have come to characterize all immediate income annuities as the “hit by a bus” type.  Year after year, their stories in popular newspapers and magazines perpetuate this misimpression. As a result, lots of people don’t learn how flexible income annuities can be, and never even consider a tool that could make their retirement years much more financially secure.

Written by Kerry Pechter

LIMRA just released annuity sales results from the fourth quarter of 2010 and the total year results, according to Ruthie Ackerman’s article in the Financial Times. “Who Were the Top 20 Annuity Writers in 2010?” summarizes the top sellers.  Total annuity sales were published along with totals for sales of variable annuities and fixed annuities.  Of the top 20, half of them had sales increases over the previous year.  The top three sellers of variable annuities reached sales records, while 70% of the top variable annuity companies saw overall sales increases in 2010.

Prudential Annuities had both the most annuity sales and the highest sales for variable annuities.  They were number one with total annuity sales of $23.3 billion and variable annuity sales of $21.7 billion.  They were fourteenth in their sales of fixed annuities.  Allianz Life of North America sold the most fixed annuities, selling $7.1 billion.  They came in seventh in total annuity sales and thirteenth in variable annuity sales.

The top 20 companies accounted for 80% of total annuity sales, 93% of variable annuity sales, and 74% of fixed annuity sales.  Rounding out the top 10 companies in total annuity sales after Prudential were MetLife, Jackson National Life, TIAA-CREF, AIG Companies, Lincoln Financial Group, Allianz Life, New York Life, RiverSource Life Insurance, and ING.  Many of the top 10 annuity sellers also made the top list for variable annuities and fixed annuities.  In addition to those already mentioned, AXA Equitable and Nationwide Financial were in the top 10 for variable annuities.  For fixed annuities, AVIVA, American Equity Investment Life, and Great American were also in the top 10.  LIMRA’s report shows the entire top 20 list for each investment.

The former vice chairman of the Federal Reserve Board, Roger W. Ferguson Jr., is working hard to get Americans to increase their savings for retirement.  According to “Former Fed official: Workers need bigger nest eggs” by Len Bosilovic of the Pittsburgh Post-Gazette, the current employee of TIAA-CREF notes that research shows most couples will be $250,000 short of the money they need for retirement.  He believes that more companies need to make a 401k annuity transfer available to their workers upon retirement since only about a quarter of them do currently.  Ferguson says that you need four things in place to save successfully: enough funding, a diverse portfolio, access to quality advice, and guaranteed retirement income to meet your basic expenses.

While saving 10 to 14 percent of your pretax income should be the goal, Ferguson says that workers should save anything they can at any given time.  Too many people wait because they don’t think they have as much as they should be saving or because their companies don’t offer a traditional 401k plan.  Most 401k plans offer diversification and seeing a reputable financial advisor is the best way to keep from getting confused and obtain quality advice.  Annuities are the best source of guaranteeing lifetime income to cover your basic needs, according to Ferguson.  He does suggest looking into annuities that account for inflation or investing in annuities that give you the potential for a rise in income.  Getting started with your savings plan is the hardest part, so even if you think you are starting late just start.

Prudential Financial Inc. and American International Group Inc. contributed to the United States’ largest variable annuity sales increase since 2007.  According to Bloomberg’s “Variable-Annuity Sales Rise 11% as Prudential, AIG Post Gains” by Inyoung Hwang, the $35.5 billion in sales was an increase of 11% for the second quarter of this year.  Prudential sold $5.3 billion of variable annuities to capture the top spot in sales.  This was a huge increase from their $3.38 billion in sales during the second quarter of last year.  Limra International believes that the market is showing signs of recovery since most of the top 20 companies had growth in their variable annuity sales.

After AIG was helped by the federal government, they increased their variable annuity sales 45% from $1.09 billion to $1.58 billion.  AIG was able to increase their operating profit by 17% after the profit from their U.S life insurance businesses quadrupled from last year’s profits.  The second highest sales of $4.5 billion belongs to MetLife Inc., although they experienced a very small decline from the same period last year.  Annuity rates and other factors contributing to the variable annuity sales affected the top companies differently.  The third and fourth place sellers were TIAA-CREF and Jackson National Life.  The industry is hopeful that this second quarter increase will continue into the future.

Variable annuity sales increased from the 1st quarter of 2009 to the first quarter of 2010, according to Insurance News Net’s “US Sales of Variable Annuities See First Year-Over-Year Gain in Two Years.”  With $31.4 billion in total sales, variable annuities increased 3% from the same time last year.  The first quarter of 2008 was the last time that there was such an increase in variable annuity sales.  A spokeswoman for the Insured Retirement Institute says that this marks a slow and cautious return to the stock market for investors.  The sales are from both individual and group annuities.

Eighty-percent of investors who purchased a variable annuity also included some type of living benefit guarantee.  The most popular was the guaranteed lifetime withdrawal benefit.  Purchasing a death benefit annuity was also widely popular to protect investors’ heirs.  Prudential Financial, Inc. remained the top variable annuity seller in the first quarter of 2010, after capturing the top spot for all of 2009.  The rest of the top five companies were MetLife, TIAA-CREF, Jackson National Life and Lincoln National Corp.  The consensus with variable annuities is that they are getting simpler for consumers and less risky for insurers.