When clients start to panic at the thought of their retirement savings not lasting a lifetime, many of them jump to the solution of an immediate annuity. While annuities are still a popular choice for soon-to-be and current retirees, the protocol for them is changing along with the churning market. As advisors, we need to be on top of the changes to ensure we guide our clients in the right direction.
The demand for annuities went up 8 percent in the third quarter of 2011, and $530 billion of the variable annuity assets had Guaranteed Living Benefit Riders (GLR)–a 19 percent increase from the third quarter in 2010. While the number of riders has increased, the hedge, or cost to provide this guarantee, has increased dramatically because of the declining interest rates. What this means is the benefits annuities are providing have been altered negatively and radically reduced. It appears the thirst for GLR seems to be slowing down, but regardless of these changes, these riders are still the most popular.
How can we help?
As advisors, it’s in our best interest to frequently meet with the marketing representative of the various annuity companies to learn how the benefits are changing monthly. For example, some companies no longer offer variable annuities, which changes the way the guarantee works. It’s our responsibility to ensure the company we choose on behalf of our client still offers the guarantee, and if it does, we should re-confirm its policy fits our client’s needs in the best way.
How do we explain this to clients?
Generally, annuity benefits outweigh the risks. They offer a lifetime income stream and protection against a market downturn with competitive fixed interest rates. In addition, they allow for tax deferred growth and death benefit options. If this sounds appealing to your clients, remember to also inform them of the administration and early withdrawal fees, since they must be cautious to avoid these. Overall, annuities are still a great solution for soon-to-be and current retirees, but as advisors, like always, we must adhere to the changes in the market and prepare our clients accordingly.
Important Disclosures regarding riders:
Living benefit riders and guarantees are subject to additional costs and restrictions above and beyond the basic annuity contract. Living benefit riders may not be suitable for all investors. Guarantees are based on the claims-paying abilities of the issuing insurance company.
This article is for advisor use only. It is not intended for use with clients or the public.
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