March 2011
Recent Research Trumps Immediate Annuities' Biggest Objection
Published by permission from InsuranceNewsNet Magazine, InsuranceNewsNet.com (Feb. 2011)
When clients ask if they will lose their money with an annuity, LIMRA has the answer.
Immediate income annuities suffer from two common misconceptions: "If I die soon after purchasing an income annuity, the insurance company will keep all my money," and, "If I need some of my money tomorrow, I can’t access it." A recent LIMRA study dispels both of these income annuity stigmas.
The study of more than 55,000 immediate annuity contracts issued in 2008 and 2009 shows that nine out of 10 lifetime income annuity buyers selected payments that were either guaranteed for a certain period of time or had refund options. A refund option enables beneficiaries to recoup the difference between the payments received to date and the original premium amount if the buyer dies soon after purchase. Refund options were selected by almost one-third of lifetime income buyers. For individuals selecting life with guaranteed payment period options, the most popular periods were 10, 15 and 20 years. By selecting these principal protection features, most income annuity buyers will receive a substantial portion of their original premium. In many cases, they may receive payments that equal or exceed the original premium.
The study also found that seven out of 10 lifetime income annuity buyers had a liquidity feature available to them as of year-end 2009. These liquidity features enable the income annuity owners to access a portion of their remaining payments in multiple ways. For example, some insurance companies allow owners to receive cash based on a commuted value of remaining guaranteed payments or a percentage of the discounted value of future lifetime payments, or in the form of accelerated payments. In addition, about half of the period-certain-only contracts had liquidity options available.
As more financial advisors incorporate income annuities into their clients’ retirement distribution strategies, advisors will be rewarded with purchases that, on average, exceed $100,000. Although just over one-third of the income annuity contracts were $100,000 or more, these contracts represented almost three-fourths of the total income annuity premium. The average income annuity premium in our study was just over $107,000. The average annualized lifetime guaranteed payments were almost $10,000 per year. In terms of gender, slightly more than half of the immediate annuity buyers were female.
As part of their retirement income planning, consumers can purchase income annuities that will cover either a single life or two lives—the latter will continue to provide income to the surviving spouse (or some other beneficiary). Among lifetime income annuities, three out of four of the contracts were single life and the remaining one in four were joint-life contracts. The average premium size of joint life contracts was around $130,000 to $140,000, higher than the average premium for single life contracts. Interestingly, nearly all joint life contracts were designated to continue to pay the same amount of income to the beneficiary.
Slightly more than 70 percent of buyers chose guaranteed income payments for life, while the remaining 30 percent opted for payments that were guaranteed for a fixed number of years only. These period-certain-only contracts can be appropriate for consumers seeking to build an income bridge from now to a foreseeable future event. Individuals can use these contracts to start Social Security benefits at age 62 (or later) or to fund certain fixed expenditures for a specific time. These contracts were smaller than life-only contracts, with an average size just under $93,000. Roughly one-third of the period-certain-only buyers were below age 64, and almost two-thirds selected a five-year or 10-year guarantee period.
Although the overall average age of income annuity buyers was 73, advisors and agents need to consider their clients’ age when evaluating possible sources of annuity funding because the clients may have clear preferences. Individuals who bought income annuities at age 75 or older were more likely to use their nonqualified (after-tax) savings. Six out of 10 income annuity contracts were nonqualified, and 60 percent of nonqualified buyers were age 75 or above. These buyers age 75 and older who use their after-tax assets to purchase the income annuity often receive attractive payout rates and may be using the annuity to assist with their estate or spousal income planning. The average nonqualified income annuity contract size was $111,000. For ages 75 and older, nonqualified contracts tended to be one-third larger than qualified contracts.
Individuals who bought income annuities before age 75 often used their qualified or pretax savings. This behavior could be influenced by the buyers’ preference to use their qualified savings first to generate retirement income and the need to begin taking qualified distributions by age 70½ due to IRS require percent of income annuity buyers using qualified assets to purchase their annuity were below age 75. The average qualified premium was $103,000.
Advisors should build their interactions with clients around key ages that correspond to the onset of either Social Security benefits or IRS-required minimum distributions. Almost one-third of income annuity buyers using pretax savings were clustered around ages 62, 65-67 and 70-71. LIMRA estimates that retirees at these key ages hold around $340 billion in pretax assets.
Although income payments that increase based on a fixed percentage or inflation were rarely selected, it is important for annuity companies to provide consumers with these options. Consumers need to be able to compare level fixed payments to payments that start lower but will keep up with the increasing cost of living. More than nine out of 10 contracts in our study had level fixed payouts.
Based on LIMRA Retirement Research Unit’s annuity surveys, sales of retail income annuities are expected to hit $7.7 billion in 2010. Although the majority of income annuity sales are still made through insurance agents (either career agents or independent agents), a growing proportion are being sold through banks, full-service national broker/dealers and independent broker/dealers. The increased focus on the need to generate guaranteed lifetime income will push income annuity sales even higher. According to LIMRA, annual fixed immediate annuity sales will exceed $12 billion by 2014.
Jafor Iqbal is associate managing director of LIMRA Retirement Research. Iqbal joined LIMRA following 12 years with Fidelity Investments. His email is Jafor.Iqbal@innfeedback.com.
Joseph E. Montminy, ASA, MAAA, is assistant vice president of LIMRA Retirement Research. He may be contacted at Joseph.Montminy@innfeedback.com.
Percent of Contracts by Age and Sources of Money
Fixed Income Annuity Sales and Forecast ($ in billions)
