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Annuities Are Constantly Adapting

As we near the end of January (can you believe it?), people are already starting to look at the forecasted annuity trends for 2015 to see what is proving to be true.  In LifeHealthPro’s article, “Annuity trends: 2015 and beyond,” Adam Cufr took a look at the recent past and predicted future of the annuity industry.  As the economy went through some drastic changes between 2008 and 2014, annuities had to quickly adapt to these changes.  The main purpose of annuity products is to protect people from longevity risk and market risk.  These risks have become an increasing liability for the companies selling annuities because both risks have intensified in the recent past.  People are living longer, which increases longevity risk.  More volatile markets have increased the market risk for insurers selling annuities.

The steep stock market decline in 2008 was the catalyst that changed the variable annuity marketplace.  Before that crash, bigger and better variable annuities were hitting the market every month.  Although variable annuity products still hold the largest piece of the annuity market share, the products have changed dramatically.  More of the variable annuities being sold now are those with living benefits, especially income riders.  This benefit is the same reason that fixed indexed annuity products have seen an increasing market share in the past few years.  Even though interest rates are historically low, advisors and clients like indexed annuities for the living income benefits that they offer.

Insurance companies have run into problems with variable annuities because they have to contend with both longevity and market risk.  In order to remain profitable, they’ve had to change pricing and lower income account rollups and payouts.  In the future, experts predict more variable annuity product changes.  ETF-based variable annuities with lower costs are likely to become more mainstream.  The income benefits offered with these products could actually be better than the high fee variable annuities that have subaccounts similar to mutual funds.  Another big change likely coming to the annuity market is the elimination of the annuity that supposedly “does it all.”  Indexed annuities are going to be positioned either as a CD alternative to use for accumulation or an income generator used for its guaranteed lifetime income stream.

One of the biggest changes happening in the annuity marketplace, however, is the predicted increasing use of annuities in retirement plans.  Recent legislation has made annuities easier to use in defined contribution plans so that Americans can create a lifetime income stream.  Retirement plans offering annuity products will make no difference if there is not a shift in the mindset of workers who have retirement plans.  In Robert C. Merton’s Harvard Business Review retirement piece, “The Crisis in Retirement Planning,” he says that retirement plan sponsors should ask employees what their income needs will be in retirement before asking anything else.  Once retirement income needs are established, the right annuity product to meet these needs can be chosen.  Variable, fixed and indexed annuities all meet different needs for people.  It is the job of a reputable advisor to match an individual’s objectives with the benefits of a particular annuity product.  Each annuity type is constantly evolving to meet the needs of both the clients purchasing them and insurance companies selling them.

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