By Sheryl Moore
I recently had the occasion to read an article entitled, “Insights into the Annuity Puzzle.” This article dedicated a whopping 1,254 words to exploring the question, “Why don’t more Americans turn their annuities into a guaranteed lifetime income stream?” Nobel laureates chimed-in on how framing, loss aversion and various other psychological methods have failed to convince the annuity purchaser to take action in securing their retirement income futures. But, ultimately, the scholars were unable to pinpoint the reason why more people don’t “create their own pension” using annuity products.
Those who want a guaranteed retirement income stream can achieve it in one-of-two ways. Both purchasing an immediate (income) annuity and annuitizing a deferred annuity can provide a guaranteed income that the purchaser cannot outlive.
That certainly sounds like a fabulous proposition to the millions of Americans who lost money in the market decline of 2008. These folks are now faced with the realization that, in order to retire comfortably, they will either have to begin saving more or working longer. In fact, 20 percent of American workers do not EVER plan to retire, a recent study by Sun Life Financial revealed. And the fact that Americans are living longer than ever before is compounding the problem. The 90-plus population has nearly tripled since 1980, according to U.S. census figures (a direct result of our nation’s cutting-edge medical advancements).
I don’t know about you, but I think that sounds like A LOT of people that need the guaranteed lifetime income benefits of annuities!
Surprisingly, however, neither immediate annuities nor annuitization are very popular. Immediate annuities are far from mainstream, accounting for just a fraction of total U.S. annuity sales. In addition, only 2 percent of annuity owners turn their contract into a guaranteed lifetime income stream via annuitization – but why?
Back in 2004, a staggering statistic rocked my world and made me start contemplating the question as to why more Americans didn’t make the move to guarantee an income they cannot outlive. As of January 1st, 2011, more than 10,000 Baby Boomers were to reach the age of 65 every day and will keep turning 65 each day for the next 19 years. How would we help these people to secure their retirement futures and provide them a guaranteed lifetime income that they could not outlive?
First, we had to investigate why people didn’t purchase immediate annuities or annuitize to begin with. My research pointed to three primary problems:
Annuity purchasers do not want to lose flexibility – The structured, inflexible payments of the traditional methods of guaranteeing lifetime income lead many to refer to it as “annuicide.” Once payments begin, they cannot be stopped, modified in amount or changed in any manner.
Annuity agents do not want to lose control of the assets – When a salesperson proposes their client purchase an immediate annuity or annuitize a deferred annuity, they lose the ability to move the monies into another vehicle should the clients’ needs change in the future. Because of the structured, inflexibility of the product, there is no opportunity for a “Plan B.”
Annuity agents do not want to compromise their commissions – Immediate annuities and annuitizing deferred annuities pays the agent a mere 3 percent commission. Contrast this with today’s average 6.60 percent commission paid on deferred indexed annuities and it is easy to see why it is hard to create a compelling “total package” in favor of the guaranteed lifetime income discussion.
For these reasons, I dreamt up an alternative to annuitization: Guaranteed Lifetime Withdrawal Benefits (GLWBs) on fixed and indexed annuities. Unlike their variable annuity brethren, the fixed and indexed GLWBs would not be used as a method of providing a principal protection element on a risk money product. After all, fixed and indexed annuities inherently offer preservation of principal and interest earned. No, these GLWBs would be utilized as an alternative to annuitization. They’d provide a guaranteed income stream the purchaser could not outlive while allowing flexibility, control and the same commission the agent was paid on any other deferred annuity.
How is it working? Phenomenally; as of 3Q, 2011, 54.1 percent of all indexed annuity sales have a GLWB attached to the contract. And, of those annuity purchasers electing a GLWB on their indexed annuities, an average of 11.9 percent are currently taking out guaranteed lifetime income under the rider provisions. When you consider that these benefits are a mere five years old and that annuitization has existed for thousands of years, achieving a nearly 12 percent utilization rate is astounding! Today, this lifetime income is ordinarily activated before year-two of the contract, indicating that the values of this benefit are greatly needed.
It is important to realize that the guaranteed lifetime income of annuities is something that doesn’t change with the mountains and valleys associated with these contracts’ credited rates. Every day is a good day to sell guaranteed lifetime income – even if the credited rate is only a mere 2.3 percent!
But if your client is looking to avoid the handcuffs of annuitization or doesn’t appreciate the structure of an immediate annuity, perhaps you should explore GLWBs on fixed or indexed annuities. This can provide a much more palatable method for proposing your clients an income that they cannot outlive.
Sheryl J. Moore is President and CEO of AnnuitySpecs.com and LifeSpecs.com, indexed product resources in Des Moines, Iowa. She has over a decade of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at email@example.com.
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