In this volatile and low-interest-rate environment, it's not surprising that people are flocking to annuities, which pay insurance company guaranteed rates and guaranteed lifetime income.
In the first half of 2011, sales of all types of annuities were up 13%, according to Limra, a Windsor, Conn., research and consulting firm supporting the insurance and financial services industries. A study by the organization released in September showed that 35% of all retirees receive income from an annuity in retirement. And 40% of those retirees say their annuity income is guaranteed for life.
"The majority of current retirees relies primarily on pensions and Social Security to meet their daily expenses, with annuities making up only 4% of their income," says Jafor Iqbal, Limra Retirement Research associate managing director. "But in the coming years, we expect to see fewer Americans retiring with pensions and more relying on their personal savings to fund retirement. Annuities will provide a reliable way to convert that savings into a guaranteed income stream."
A poorly performing stock market is also fueling the use of annuities, according to research by Alessandro Previtero, an assistant finance professor at the University of Western Ontario's Ivey School of Business. Previtero analyzed the actions of more than 100,000 people retiring over six years from 2002 to 2008. The results showed that new retirees are much more likely to purchase an annuity when the stock market has performed poorly over the past year. Conversely, when the stock market has performed well over the past year, people are much more likely to take a lump sum from their retirement plans.
His findings may help explain why people are flocking to variable annuities with guaranteed lifetime withdrawal benefits. Variable annuity sales were up 20% in the first half of 2011, according to Limra. Over half of variable annuity sales are in IRA rollover accounts, according to the Insured Retirement Institute in Arlington, Va. Meanwhile, Limra data reveals that 61% of those who elected a guaranteed living benefit opted for the guaranteed lifetime withdrawal benefit rider. And through June 30, 2011, $315 billion in variable annuity assets included elected guaranteed lifetime withdrawal benefits.
"I think more people are open to looking at annuities after having watched their portfolios plummet from the correction in 2008 and part of 2009," says Greg Womack, an Edmond, Okla.-based financial planner. "People are looking for a safety net for some of their investments. Variable annuities make sense for some and for a portion of their investments. It can provide a guaranteed income benefit."
But advisors must inform clients, he says, that if they cash out their annuities, they get only the current market value. In addition, he notes, the total cost of the variable annuity can be as high as 300 basis points. "It is hard to say if it is worth it or not," he says. "It depends on if it can help [the client] sleep better at night, and if [the client has] other investments ... for liquidity needs."
Clients looking for a low-cost option to stand-alone long-term care insurance are meanwhile turning to combination fixed-annuity, long-term care products. Hybrid annuities typically pay three to four times the amount invested in the fixed annuity for long-term care expenses. As a result, someone who invests $100,000 in the annuity may tap enough to cover three to four years' worth of nursing home expenses.
Following strong double-digit growth in 2009, new premium sales of individual life insurance combination products jumped 62% in 2010, reaching $1.2 billion, according to Limra's research. Catherine Ho, Limra's research actuary, says that if all indications are correct, 2011 should be another strong year for combination annuities.
"Overall, sales of combination products in 2010 were remarkable, especially coming off the double-digit growth experienced in 2009," Ho says. "In addition to carriers boosting their marketing campaigns, consumers' growing desire for an alternative to stand-alone long-term care insurance has driven sales of these products. For some buyers, combination products are a more affordable alternative to stand-alone [long-term care insurance]."