Filed Under:Life Insurance, Life Products

Don’t fear annuities

Genworth Research

The key takeaway from Genworth’s recently released study, The Future of Retirement Income Study, can be summed up by the concept of perception versus reality: Consumers perceive annuities more positively than financial professionals give them credit for.

The study was the culmination of in-depth interviews, focus groups and quantitative surveys of 400 financial professionals and 1,340 retirees and pre-retirees, including those that owned and did not own annuities. 

At a time when creating a reliable income stream is more challenging than ever before, the study found that perceived consumer objections to annuities could be hindering producers’ ability to help clients reach retirement income goals.

Therefore, I’ve re-created a typical conversation I might have with financial professionals who have previously shied away from presenting annuities as an option to their clients.

Can I present annuities as a solution to clients seeking a reliable retirement income stream?

Absolutely. An annuity can guarantee a contract holder an income stream for life. Recent sales figures of indexed annuities confirm just how much consumers are seeking security. Total sales of indexed annuities hit $9.2 billion in the second quarter. That is a 17 percent jump compared with the previous quarter and a 5.5 percent year-over-year increase from Q2 20121. When adding an optional guaranteed lifetime income rider, consumers can obtain the confidence that they will receive income, without losing control of their contract value, for as long as they live.

Despite all this, however, Genworth’s The Future of Retirement Income Study shows that many financial professionals overlook this data due to their own misperceptions about the product’s appeal to their client base.

Annuities often get a bad rap and I’m worried about losing credibility if I were to present them to a client. How do I work around this?

Consumers actually view annuities more positively than some media headlines might imply. In fact, according to the study, the vast majority of annuity owners, 91 percent, have a positive or neutral impression of the product.2

Despite this enthusiastic response, many producers appear to be losing out on business. In fact, the survey found that 40 percent of consumers who do not own an annuity are likely to consider purchasing one, but have never been presented with the opportunity by a financial professional.3

Among clients that don’t currently own annuities, what are the most common objections I should be prepared to address?

The survey found that the most common objections about annuities among those who do not currently own the product are liquidity, growth and expenses. However, the survey also found that those who own annuities feel very differently about these issues.  

Help me overcome each of these objections one-by-one. Are my clients’ concerns about liquidity justified? Or is there a better way to approach this topic with them?

Approximately half of those who do not own annuities object to them because of concerns regarding liquidity. However, 78 percent of those who own annuities are satisfied with the level of access to their funds.

Furthermore, while most annuities have surrender charge periods, and some have a Market Value Adjustment, generally between five and 10 years, many contracts offer up to 10 percent in surrender penalty-free withdrawals of contract value each year. Additionally, many contracts have further provisions for expanded surrender penalty-free access if necessary due to medical needs, such as confinement due to long-term care. In addition, it is important that clients understand that a federal 10 percent early withdrawal penalty tax will generally apply to any taxable amounts withdrawn from either a non-qualified deferred annuity or an Individual Retirement Annuity (IRA) prior to the contract holder attaining age 59-and-a-half, becoming disabled, or otherwise meeting an exception to this penalty. 

Many clients are enamored by the strong growth in the stock market, which makes them overlook other vehicles like annuities. Can I realistically present an annuity to them as a better alternative?

More than half of consumers surveyed said they would rather invest directly in the market than purchase an annuity.4 That is concerning if pre-retirees have not taken into account the impact a market downturn could have on their retirement portfolio. As the events of the past 13 years have shown, for those nearing or in retirement, too much exposure to volatile markets can be devastating to their retirement portfolio’s ability to generate sufficient income for life.

Alternatively, most fixed indexed annuities guarantee that contract value will not decline due to market downturns and offer interest crediting strategies linked to the performance of a market index.Thus, clients can enjoy upside potential and downside protection. In fact, indexed products are beginning to complement, and in some instances, replace other conservative assets such as traditional fixed income products in many consumers’ retirement portfolios. With the potential of a rising interest rate environment, principal in instruments such as bond mutual funds may be more vulnerable to loss. An indexed product, meanwhile, may be able to protect your principal against market downturns and rising interest rates, while still offering upside potential tied to the returns of an index, up to an interest crediting cap. 

Last but not least, my conversations always turn to the fees associated with annuities. How do I handle this topic? 

Seventy percent of annuity owners say the fees are worth the benefits they are receiving.5 Additionally, it is important to note that fees vary by type of annuity. Variable annuities can include fees and expenses of 200 to 400 basis points annually. However, fixed annuities generally do not charge specific fees or expenses as a part of the core contract. As mentioned previously, many fixed indexed annuities offer an optional guaranteed lifetime income rider, often charging an annual fee of less than 100 basis points. Consumers often consider this a worthwhile cost for more confidence in their retirement income. 

Which of my clients should I approach about considering annuities?

Our research examined the practices of high-volume fixed indexed annuity sellers and compared them to low-volume fixed indexed annuity sellers. We found that many financial professionals have misperceptions about which clients are the best candidates for annuities.

Although annuities are often perceived as a product for older clients, the ideal consumer demographic is actually much wider. While consumers ages 50 through 70 account for an important part of the annuity consumer base, financial professionals selling the most fixed indexed annuities (FIAs) also engage younger clients aged 40 through 49. On average, this age group represents 17 percent of a high-volume FIA seller’s client base, while only making up 4 percent of an infrequent FIA seller’s client base.6

Another area where high-volume fixed indexed annuity sellers take a different approach is in presenting annuities to medium-risk-tolerance clients, not just low-risk-tolerance clients. More than half (52 percent) of high-volume FIA sellers focus on medium-risk-tolerance clients compared to just 36 percent of infrequent FIA sellers.7 Another way to think of this opportunity is that even many clients with moderately aggressive risk tolerance have a fixed income component within their portfolio and FIAs could be a suitable complement to or alternative for a portion of this allocation.

In conclusion, financial professionals may be overlooking opportunities to present annuities because of their own misperceptions about the product’s appeal among consumers and their assumptions that only older, conservative clients are interested in annuities. By overcoming your own perceptions and focusing on the role that annuities can play in both accumulating wealth and creating retirement income, you will have more productive conversations with your current clients and prospects. 

Read more about the annuity opportunity and the ideal customer for the product: Putting Your Clients in Control of the Future.

1 Wink, Inc.: Wink’s Sales & Market Report, Q2 2013

2-7 Genworth: The Future of Retirement Income Study, 2012

About the Study

During 2012, Genworth conducted The Future of Retirement Income Study in conjunction with Directive Analytics, a third party research administrator. The study consisted of several phases, including in-depth interviews, focus groups and quantitative surveys with both consumers and financial professionals. In October 2012, an online, quantitative survey was completed by 1,340 retired consumers and pre-retirees between the ages of 40 and 80 with at least $50,000 in household income. In December 2012, an online, quantitative survey was fielded among 400 financial professionals with at least one year of experience. Presented results represent statistically significant findings tested at 95% and 90% confidence intervals.

See also:

‘I hate annuities’

The faulty argument vs. fixed indexed annuities

Delving into the ascendance of FIAs

More Resources

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