As baby boomers retire, fixed immediate annuities have emerged as one of the most attractive ways to reduce a client's longevity and investment risk.

Although sales were down a tad in the first quarter of 2010 compared with the prior year, fixed immediate annuity sales for 2009 more than doubled over 2008. Sixteen billion dollars worth was sold in 2009, according to LIMRA, Windsor, Conn.
A fixed immediate annuity is a contract with an insurance company. Policyholders invest a lump sum in return for insurance company-guaranteed income, generally monthly, for as long as they live.

If the policyholder dies, the insurance company keeps the balance of the proceeds-unless arrangements are made to pass proceeds to loved ones, typically in exchange for lower monthly payouts. With one of the most common contracts, called "10 year certain and life," periodic checks come to a client for life. If the annuitant dies within 10 years, checks continue to a designated beneficiary for the remaining term. Or, the beneficiary may receive a lump sum in cash. Another payout option enables the surviving spouse to continue receiving income for as long as he or she lives.

A 2009 report by Conning Research, Hartford, Conn., says increased sales of all types of fixed annuities are a harbinger of things to come.

"The severity of the current recession, which began in 2008, reignited customer concerns about their principal's safety, renewing interest in fixed and indexed annuities," the report says. Meanwhile, the baby boomer generation is shifting its focus from accumulating assets to spending them.

Demand has been so strong for fixed immediate annuities that New York Life plans to make its product available to fee-only advisors, says Chris Blunt, that company's executive vice president. New York Life sells a product with a trailing commission through its agent force, banks, wirehouses and independent broker-dealers.

Some $2 billion flowed into New York Life's fixed immediate annuity in 2009, making it the number one product on the market, according to LIMRA. By contrast, in 2005, only $11.5 million was invested in the product.

Blunt says insurance-guarantee payout rates that are as high as 8%, depending on a person's age, are attracting retirement investors. Lifetime income payments are higher than bonds, CDs and dividend-paying stocks for a couple of reasons. The monthly payments are comprised of a return of premium, and interest earned from insurance-company investments of premiums and mortality credits, also known as mortality yields, which factor in the policyholder's life expectancy. The older the policyholder, the higher the payout will be due to a shorter life expectancy.

With fixed immediate annuities, premiums paid by those who die early are expected to contribute to gains on the overall pool and provide a higher credit to survivors.

"Baby boomers are getting older and haven't saved enough,"  Blunt says. "The payout rates of 7% to 8% on immediate annuities are higher than CDs and mutual funds."

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