By Linda Koco
Contributing Editor, AnnuityNews
Financial advisors ran searches on single premium income annuities valued at an average of $231,000 last year, according to a 2011 report from an income annuity database.
“That’s a surprising average premium, compared to the $100,000 premium that often shows up on to single premium income annuity (SPIA) applications that advisors actually submit to annuity carriers,” says Gary Baker, president of CANNEX (U.S.), which runs the database.
The firm tracks searches for SPIA premiums, products and companies that financial advisors submit throughout the year on behalf of clients. The advisors include reps of independent broker-dealers, banks, wirehouses, independent life marketing organizations, and brokerage general agencies.
The $231,000 average premium for 2011 was in keeping with the averages for searches in each quarter of 2011. For instance, in first quarter 2011, the average SPIA premium that advisors plugged into the firm’s search engine was $259,530. In second quarter, the average was $243,062; in third quarter, $215,796; and in fourth quarter, $220,485.
Why so high?
Since actual policies submitted tend to be well below those 2011 numbers, the natural question is why are the premiums in the CANNEX study so much higher?
It’s possible that financial advisors are researching the actual amounts that clients are considering for allocation to a SPIA, Baker says. “The advisor may be trying to get an idea of cash flow possibilities for the client.”
The average age of the SPIA customer is 70, according to the study. “By that age, many people are consolidating accounts,” Baker says. “The advisor may recommend that the client set aside $200,000 or more to fill the gap in living expenses that occurs between expenses covered by Social Security benefits and those not yet covered.” The advisor may then turn to the search engine to find out how much monthly income the person could get from that amount, he says.
Then, when it comes time to place the business, the advisors may decide to split the case between two insurers, Baker says. That would result in Carrier A and Carrier B each receiving an application from the agent that is written for a little more than $100,000—well within the premium range that the industry has come to expect.
Case-splitting is not an uncommon practice among advisors, Baker points out. Advisors will do this for risk management purposes and also to keep the policy values within the limits of state guaranty funds.
The SPIA amount actually written also depends on the intended use of the money coming from the SPIA, he says. In many instances, the money is for living expenses, as noted above. But in other cases, some of the money will be for a specific use, such as to fund a life contract over a period of 10 years or so, and that specific use will govern the size of the contract submitted to the carrier.
Money for living expenses
Baker believes data in the report suggests that advisors are seeking SPIA information mostly for older consumers who are at the higher end of the mid-market.
For instance, the study shows that the average age for male buyers is 69 and for females, 71. “People in their late 60s and early 70s have often received inheritances and they also have substantial assets in non-qualified accounts,” says Baker. “They would be going to advisors at this time in life for guidance on what to do with that money.”
A figure in the report supports that this may be in fact what happened in 2011. It shows that 77 percent of the SPIA searches during the year involved money that is coming from non-qualified accounts. These accounts would include investment and bank accounts, Baker says. The remaining searches involved money in tax-qualified products such as IRAs.
The advisor would be looking to address the client’s income need by using the client’s non-qualified money, because that money is relatively liquid. By comparison, “the qualified money would likely already be locked up by that stage in life,” Baker says.
Monthly income calculations from the 2011 numbers suggest that the monthly payouts that those numbers could make a noticeable difference in a client’s ability to meet living expenses.
For example, the $231,000 average premium would produce a monthly income of $1,200 a year for a 65-year-old male, Baker says. For a man who is 69 (the average age of male buyers), the monthly income would be more--nearly $1,500 at one carrier, for instance. For a 71-year-old woman, it would be slightly lower than that for the 69-year-old man.
Ninety percent of the 2011 searches were for income start dates that begin within 15 to 31 days of policy purchase, Baker points out. “That indicates that people are generally looking to buy SPIAs to generate income right now,” not sometime in the distant future.
Some other findings from the 2011 report include:
Annuity types were roughly split between single life (61 percent of searches), joint life (19 percent), and certain only (20 percent).
The guarantee types for lifetime contracts were split between life-only (32 percent of searches), life with period certain (45 percent), and life with refund (23 percent).
Deferred income annuities (DIAs) represented about 5 percent of the activity, but CANNEX says this percentage will likely increase in 2012.
Only 3 percent of searches involved products that include a cost of living adjustment provision.
All annuity comparison
Account balances of all types of annuities combined -- fixed and variable, deferred and immediate -- tend to run lower than not only the $231,000 average SPIA premium that advisors searched for in the CANNEX study. The average balances are also lower than the $100,000 or so SPIA premium that carriers and advisors often discuss as an average for SPIA cases that are actually placed.
For example, in its 2011 IRI Fact Book, the Insured Retirement Institute, Washington, D.C., indicates that roughly one-third of fixed and variable annuity balances are less than $20,000, and that three-quarters of both fixed and variable annuity balances are less than the $100,000. These figures are from a 2010 study by Cerulli Associates and Phoenix Marketing International, IRI says.
Apparently, then, on an all-industry level, annuity buyers tend to have relatively modest amount in their annuities. But when it comes time to set up a guaranteed income stream, they will go higher—to $100,000 or even more.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].
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