August 1, 2014 • Reprints
Annuity sales in 2013 totaled
$220.9 billion, of which $209.9 billion were attributable to deferred
annuities.
How is the rise in life expectancy impacting financial needs
in retirement? Which annuities nabbed the lion’s share of product sales last
year? And why are the wealthy—particularly the most affluent among them—buying
annuities, given their other substantial assets?
Answers to these questions, among many others, are
forthcoming in the Insured Retirement Institute’s “IRI Fact Book 2014.” The
198-page report, an all-encompassing guide to information, trends and data in
the retirement income space, explores the state of the industry, annuity product
innovations, and solutions for generating immediate and future income needs.
The report also details consumer use and attitudes towards
annuities, spotlights trends among baby boomers and generation X women,
examines boomer expectations for retirement this year, and delves into the
regulation and taxation of annuities.
The following is a sampling of key findings unveiled in the
report.
Fact 1: Americans are living longer amid rising healthcare
costs.
The IRI Fact Book 2014 reveals a significant increase in the
life expectancy of 65-year-olds over the past quarter century. In 2010, the
average life expectancy for a 65-year-old male was 82.7. This compares with
79.1 years in 1980.
“While an increase of three years may not seem dramatic over
a lifetime, it can have a significant impact on one’s retirement security,” the
report states.
To make its point, the report cites the example of an
individual with annual expenses of $50,000 in retirement. Expenses for a
65-year-old living 14 years in retirement would total $700,000. Assuming
this person lives 17 years in retirement, the additional three years of
expenses would bring the total to $850,000, a 21 percent rise.
The report adds that healthcare costs for the average
65-year-old will be $250,000 over a 20-year retirement and nearly $500,000 over
a 30-year retirement.
Fact 2: Deferred and variable annuities accounted for most
annuity sales in 2013
Annuity sales in 2013 totaled $220.9 billion, of which
$209.9 billion were attributable to deferred annuities and $11.0 billion to
immediate annuities. Variable annuities accounted for $142.8 billion, whereas
fixed annuities hit $78.1 billion.
Assets under management in annuities reached a record-high
of nearly $2.6 trillion.
“While some companies have slowed down or eliminated new
annuity sales, there has been an influx of private equity firms entering the
annuity market, specifically by purchasing interests in fixed-indexed
companies, as well as variable annuity blocks,” the report states.
“Additionally, companies are innovating with new products that are less
capital-intensive, which may increase the capacity at certain companies.”
Fact 3: Sales of fixed immediate income annuities have more
than doubled since 2003 and were up 20 percent in 2013 alone
The report expects sales of fixed immediate income annuities
to continue to increase. Among the reasons why: Lifetime payouts remain
attractive in the current low interest rate environment due to survivorship
credits. And these credits will become more appealing as interest rates rise.
The report notes also that that federal government has been
encouraging employer sponsors of defined contribution retirement plan,
such as 401(k)s, to offer these annuities as options for retiring employees.
“Their popularity is likely to rise as the public becomes
more familiar with them in this context,” the report states. The research adds
that carriers are “adding liquidity and inflation-protection features to
existing products, or introducing new ones with these features, to overcome advisors’
and consumers’ historic objections to the products.
Fact 4: In 2013, 72 percent of variable annuity sales were
in products offering a guaranteed minimum withdrawal benefit (GMWB) or
guaranteed minimum income benefit (GMIB)
The report observes that the top-selling variable annuity
products are consistently sold or offered with a GMWB or GMIB option; and that
about 70 percent of sales are reported in qualified plans (i.e., sales wherein
tax-deferral is a function of the plan, not the product.)
Fact 5: More than one in three (36 percent) investors have
an annuity within their investment portfolio.
The research observes, however, that this percentage is down
from the 42 percent of investors who reported owning an annuity in 2012. The
use of fixed, fixed income and variable annuities is also down from 2012.
The research adds that owners of variable annuities are
equally likely to be male or female (51 percent vs. 49 percent). Indexed
annuity owners are more likely to be males (58 percent vs. 42 percent), whereas
fixed annuity owners are somewhat more likely to be female (53 percent vs. 47
percent).
The study notes also that, in 2013, ownership of fixed
annuities is greatest among the Generation X and Y affluent populations (62
percent combined). Older generations (those born in 1956 or before) are more
likely to own fixed (60 percent) and variable (57 percent) annuities.
Fact 6: Familiarity with annuities and their benefits
increases with wealth, as does the belief that annuities can diversity and
protect assets.
The research reveals that 20 percent of investors with more
than $5 million in investable assets say that they plan to purchase an annuity
in the next year.
“While wealthier clients may be among the greatest annuity
product advocates, they also are the group to most likely express skepticism
over an insurer’s trustworthiness and ability to fulfill long-term guarantees,”
the report states. “For these investors, an insurer’s financial strength
ratings and communication process of how guarantees are competitive, yet
prudently hedged and priced, are of utmost importance.”
Fact 7: Nearly half of households (43 percent) cite
guaranteed monthly benefits as the primary reason for purchasing an annuity.
The research indicates that this reason is especially
prevalent among investors with $2 million in investable assets. Investors
owning investable assets between $2 million and $5 million place the greatest
importance on potential account growth (41 percent). In contrast, the
wealthiest investors (those with $5 million-plus in investable assets) want to
insure portions of their assets (39 percent).
Other reasons cited by the wealthiest investors include:
● To generate a guaranteed payment each month in retirement
(37.6 percent)
● To provide a potential for account growth (34.9 percent);
● To receive tax-deferral on earnings in the annuity (33.4
percent); and
● To set aside assets for heirs (32.8 percent)
