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Important Annuity Information From the IRI

I recently blogged about seven important facts from the IRI Fact Book 2014.  Life Health Pro’s Warren S. Hersch has been summarizing the 200 page report so that we can get the most important annuity and retirement information.  In “7 facts about annuities you should know,” Mr. Hersch discussed some more of the timeliest data and trends related to annuities.  The IRI researched how consumers feel about and use annuity products, specific trends related to Baby Boomers and women in Generation X, the overall state of the annuity industry and what innovations we should expect to see in the future.

There has been a significant increase in life expectancy over the past twenty-five years, even with soaring healthcare costs.  Sixty-five year olds have a life expectancy of 82.7 years now compared to 79 years back in 1980.  Three years is a lot of time to finance, so consider the consequences to your retirement plan.  An average 65-year old will need around $50,000 a year during retirement.  Living for three more years will add $150,000 to your financial needs.  That increases your necessary retirement savings by 21%, so it is crucial to plan accordingly to make sure that an increasing life expectancy doesn’t make you run out of money in retirement.

The biggest annuity sellers in 2013 were variable annuities and deferred annuities.  Deferred annuities accounted for $209.9 billion of the $220.9 billion in total annuities sold.  Variable annuity sales were $142.8 billion, which is almost double the $78.1 billion in fixed annuities that were sold.  New private equity firms have been entering the market showing great interest in fixed indexed and variable annuity product blocks.  This makes up for the number of insurance companies who have cut back on selling annuity products, in particular variable annuities.  Some of the newer annuity products don’t use as much of the companies’ capital, so insurers have more room to add annuity products to their line-up.

Fixed immediate income annuity sales went up 20% in 2013 and have doubled in the last decade.  People are using them more for the lifetime payouts since their survivorship credits are beneficial when interest rates are low.  This will only get better as interest rates rise.  Another reason that these products have increased in popularity is because the government is stressing their importance in retirement plans like 401ks.  Insurance companies are adding inflation protection and innovating the products to make them even more accessible to the mainstream.

The majority of people purchasing variable annuities still seek guaranteed benefits.  Close to 3/4 of those sold included either a guaranteed minimum withdrawal benefit (GMWB) or a guaranteed minimum income benefit (GMIB).  The best selling variable annuities continue to offer these guaranteed benefits, although some companies are offering variable annuities based solely on their tax deferral right now.  Seventy percent of the variable annuities sold are through qualified plans still, so the tax deferral is a function of the plan rather than the variable annuity itself.  This might be a changing trend in the future though.

While 42% of investors had an annuity in their portfolio in 2012, that number decreased to 36% in 2013.  Fixed, fixed income and variable annuity products are also seen less in portfolios than in previous years.  Males and females have almost the same likelihood of owning variable annuities, but indexed annuity owners are more often male and fixed annuity owners are more often female.  The affluent members of Generation X and Generation Y typically own fixed annuities.  The older generations almost equally own fixed or variable annuities.

As people’s wealth increases, they are more familiar with annuity products and the benefits they offer.  Twenty-percent of those investors who have more than $5 million in investable assets plan to purchase an annuity this year.  They are great advocates for annuity products and believe that they are a good way to diversify and protect their assets.  But these investors are also skeptical of insurance companies and worry about them fulfilling long term contract guarantees.  These investors look closely at financial strength ratings and how companies communicate.

The number one reason that most people buy annuity products is for their guaranteed monthly income.  Those investors with $2 million in investable assets chose this as their number one reason 42% of the time.  When it comes to investors with $2 to $5 million, 41% of them say that their top reason for buying an annuity is for the potential to grow their account value.  Investors with more than $5 million choose annuities most often to insure some of their assets.  That was the top reason for 39% of these investors.  For these wealthiest investors, the other reasons they buy annuities are for the guaranteed monthly income, potential account growth, tax-deferral on their account earnings and leaving money to their heirs.

Annuities are important products in the retirement industry.  The IRI Fact Book 2014 gives the state of the annuity and retirement industry overall.  If you have any questions about annuities or their benefits, an Annuity FYI expert would be happy to assist you.

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