When I joined the insurance industry in 1977, life insurance was the focus product. A small number of producers also sold disability income coverage, and long term care insurance was in its infancy, with few agents knowing much about it and even fewer attempting to sell it.
And, of course, there were annuities, the all-but-forgotten product line. Just about their only use back then was to guarantee the payout on defined benefit pension plans.
Thirty years later, annuities have emerged as a truly important tool in the financial planning process.
Since annuities offer the opportunity for tax deferral during accumulation and guaranteed tax-favored distribution, there's good reason for their prominent position. They are particularly appealing to older consumers who want to take advantage of deferred income tax payments on their investments while they are trying to grow their assets. With few alternatives for doing this even today, annuities are particularly appealing.
Annuities also address the fear of many older Americans, who are living longer than ever before, that their financial vehicles will be depleted before or during retirement. Many have one-third of their lives still ahead of them. It's not surprising that they are concerned about outliving their resources, an issue that is only likely to become more magnified over the next 25 years.
Since annuities are designed to provide their owners a guaranteed income stream for a designated period or for their entire lifetime, the products can help alleviate your clients' fears that they'll run out of money just when they need it the most.
As expected, the demand for annuity products has helped create something for everyone. As insurance carriers recognized the market potential for annuities, their shelves began filling up with a slew of niche products. Since demand is expected to continue growing, you will likely see many more products meant to meet consumers' specific needs.
For example, deferred annuities are particularly attractive to consumers age 70-plus, as well as baby boomers age 50 or older -- these prospects generally have funds that they want to invest and grow until they need the money.
Then there are variable annuity plans that allow numerous investment choices, although loss of principal is possible in a down stock market. Some plans guarantee a death benefit or income stream.
Equity index annuity plans guarantee as much as 3 percent for a specific period and credit additional interest based on various indexes, most commonly the S&P 500. Dividends are not included, and a good result is 6 to 8 percent with minimal risk. For the truly cautious, some companies offer CD-like plans, with guarantees running from one to 10 years. They also currently offer guaranteed interest rates between 4 and 5 percent.
It's safe to assume that single premium immediate annuities (SPIAs) that guarantee benefits for the lives of one, two, or even several annuitants will become extremely expensive because of the ever-increasing longevity of Americans. (See sidebar for more information on SPIAs.)
Consumers in their 60s, or even their 70s, may find themselves in the strange position of being "too young" to obtain a good buy or even an affordable lifetime annuity. This, however, is the price we pay for living so much longer today than ever before.
In the future, consumers may want to split their assets, with a portion of available funds going to a 10 or 20-year specified payout period and the remainder to a deferred accumulation annuity. Then, the accumulated sum can be used to purchase a new certain payout period annuity should the annuitant be 90 or older.
Too often, advisors look at an annuity as something of a standalone product, a good, safe place for funds that can become either an immediate or future income stream. However, with the proliferation of annuities designed to meet specific client needs during particular periods of a client's retirement years, advisors now have the opportunity to strategically use these products during the planning process.
David Colburn, LUTCF is a brokerage manager at First American Insurance Underwriters Inc. He can be contacted at 800-444-8715 or dcolburn@faiu.com.
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