The National Association for Fixed Annuities (NAFA) held a contest last month celebrating their 15th anniversary. They asked members to answer two crucial questions regarding the fixed annuity industry. It was a contest to encourage more responses from their members, whose time is valuable. In NAFA Member Insights on Industry Challenges & Solutions, Kim O’Brien gives the questions and the winning member responses. NAFA members represent more than 85% of the independent fixed annuity industry. They are well aware of what is happening in the industry, what challenges it faces, and what potential solutions exist. A summary of the two questions and the winning answers follows.
What is the single greatest challenge faced or innovation needed for fixed annuities to successfully meet the challenges of the next 15 years?
Chris Conroy says that the biggest challenge facing the fixed annuity industry is the public perception of these products. People are living longer and being forced to create their own pensions. They need the guaranteed and predictable income provided by fixed annuities. The next few years will bring the largest amount of retirees ever, so now is the most important time in history for the fixed annuity industry to improve public perception. The annuity perception puzzle, as it is often called, is caused by many things. Misunderstanding of the products, mistrust of regulators, and misinformation in the media are some of reasons, but the industry cannot control these reasons. Mr. Conroy calls for those who believe in fixed annuities to cause the change, starting with NAFA.
According to LIMRA research, people desire the benefits of fixed annuities when they are asked about them but the term “annuity” is not mentioned. Then when asked how they feel about annuities, their perception immediately turns negative. One reason for this complexity might be that many annuities are not annuitized for their guaranteed income. This stems from the fact that people are either ignoring longevity risk or don’t realize how much they should be concerned with living a long life. The author thinks that using the term longevity with fixed annuities might be a good way to increase consumer perception. This winning answer even had a personal story attached to show just how hard-headed some Americans are when it comes to their preconceived beliefs. Mr. Conroy’s parents are at the perfect age to buy a fixed annuity to finance part of the their retirement, but even they have a negative perception with a son deeply rooted in the fixed annuity industry. The industry will have to continue working hard to break that annuity perception puzzle and let Americans know the benefits of fixed annuities.
What is the single greatest task or solution that NAFA needs to do to help the fixed annuity industry meet these future challenges?
The winning answer to this question came from Paul Garofoli of National Western Life. His answer was simple, but the reasons behind it a little more complex. He says that the 10% tax penalty assessed for taking money out of an annuity before the age of 59 1/2 must be repealed. He points to this tax law actually being ironic for a few reasons. The annuity industry is often criticized for the surrender charges associated with some products and the fact that they “target” senior citizens. The 10% tax penalty makes it difficult to target anyone under the age of 60, and most certainly for an immediate annuity. This penalty for early withdrawal is much more severe than any surrender charges and affects more people. Mr. Garofoli lists five reasons that this 10% tax penalty should go away. A few of them are that he believes there will be more product innovation, bring younger people into the business, and encourage people to save at younger ages.
The fixed annuity industry faces some of the same challenges that other annuities do. If you need help understanding the ins and outs of annuities, speak with an expert before discounting the products altogether. Fixed annuities are one of the best ways to ensure that your money lasts over your lifetime and that you are able to live comfortably in retirement.
Written by Rachel Summit