Have you noticed the increased interest in annuity products
this year? This increased interest is coming from both consumers and financial
professionals.
Why is this happening? Why now? I think there are seven
common sense reasons for this awakening. These reasons have their roots in
demographics, the economic environment and recent product innovations. Let’s
explore the rebirth.
Here are the key areas where value is available for the
buyer and financial professional:
1. The Demographic Steamroller Continues
The aging of the US population continues. There are 10,000
people per day turning age 65 and 16.5% of the population is now age 65 or
older. By 2030 all baby boomers will be at least 65 years of age. This growing
age cohort is moving from accumulating assets to protecting what they have and
generating the most income from their capital.
2. Desire to Protect Equity Market Gains
Older individuals who have done well in the equity markets
are looking for ways to lock in the gains they have generated. Moving the money
from pure equity products into most types of annuities protects their principal,
including the gains.
3. Tax Deferral
One of the intrinsic values of annuity products is the
tax-deferred build-up of accumulated interest and product gains. With income
tax rates likely to increase at the federal, state and local level tax-deferral
is a very valuable characteristic of annuity products.
4. Risk Management
Annuities are an insurance product, and this is becoming
better understood. Whether to protect principal, create guaranteed income
streams or to take advantage of supplemental long-term care and death benefits
these products are insurance.
One use that is increasingly common is to trigger guaranteed
income streams as a hedge against sequence of return risks for other equity
assets.
5. The Need for Sources of Protected Lifetime Income
Individuals cannot find sources of protected lifetime income
that annuities can provide. The number of individuals with defined benefit
pensions continues to decline.
With interest rates on long-duration fixed income
investments at such low levels annuities have become a more attractive tool to use
in financial planning.
6. Leveraging Product Efficiencies
When purchasing an annuity product, the buyer is receiving
the professional asset management capabilities of the issuing life insurer,
asset/liability management expertise, actuarial knowledge, mortality credits
from the insurers having large books of business and the protections of
state-based solvency regulation behind the capital the insurer has deployed to
support the business.
These are capabilities most all buyers or financial
professionals do not possess if they chose to create an annuity-like replacement
vehicle.
7. Product Innovation
Life insurers have brought new product structures to market
(e.g., buffered or registered indexed linked annuities), new indexing
strategies, products focused on the needs of the RIA community and adding
innovation features such as long-term care benefits and the ability to pay for
advice from the annuity product without triggering current income taxation.
Remember This
Annuities have strong intrinsic values. Tax deferral,
flexible income options, limited liquidity, accumulation provisions and payout
guarantees are at the top of the list.
As a result of this period of historically low interest
rates, financial professionals are turning over rocks to find their clients
yield and sources of protected income. In prior eras, when interest rates were
much higher, taking accumulated savings and turning them into reliable, mostly
principal protected income streams was much easier to accomplish
All along annuity products have been there, staring
consumers and financial professionals in the face. Now looks to be the time for
them to get their time in the sun. I think all parties should look to capture
this opportunity.
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