Income Annuities Elbow In

March 31, 2011

By Linda Koco
Contributing Editor, InsuranceNewsNet

March 31, 2011 -- A once-snubbed annuity product — the income annuity — appears to be gaining a foothold in the broad annuity marketplace and in the practices of advisors who serve the boomer and retirement income markets.

Two recent sales studies show gains for the guaranteed income products in 2010. That is notable since overall annuity sales, including fixed and variable, were down, not up.

Beacon Research, Evanston, Ill., is reporting that in 2010, income annuities claimed an 11.1 percent share of total fixed annuity sales tracked in its database. That was on sales of $7.9 billion — a pittance compared to, say, variable annuity sales at about $140 billion, but an eyebrow-raiser because of the market share growth.

“The 2010 income annuity market share was the largest income annuity share in the eight years Beacon has been studying annuity sales,” says Judith Alexander, director of sales and marketing at Beacon. This is up from a 7.5 percent share in 2009.

By comparison, in 2008, a record year for annuity sales, the income annuity market share was in the 8 percent range on sales of roughly $8.6 billion, Beacon reports. In 2003, the first year of the Beacon study, market share was in the 5 percent range on income annuity sales of $4.7 billion.

LIMRA is seeing signs of sales momentum, too. In 2010, income annuity sales in its database represented a 3.4 percent share of total annuity market (fixed and variable) based on income annuity sales of $7.6 billion. That is up from 2009, when income annuities had a 3.1 percent share of market on $7.5 billion in sales. The 2010 sales are 1 percent higher than those of 2009, LIMRA says.

[Note: The sales numbers for the two firms differ due differences in database components, definitions and other factors. The trend lines are similar, however.]

The 2010 numbers reflect “stable performance” for the product line, says Joseph Montminy, assistant vice president-annuity research at LIMRA.

Actually, he adds, “when compared to what was going on in the environment and the history of the product, this is relatively strong” performance.

While income annuity sales rose slightly in 2010, he explains, overall annuity sales—including variable and all types of fixed annuities—were down by 7 percent. That decline was largely due to a 27 percent drop in total fixed annuity sales for the year, Montminy says.

Because income annuities are a type of fixed annuity, their growth amid a big decline in total fixed sales is getting attention. At least two large national insurance companies have entered the income annuity market for the first time, points out Montminy.

The relationship is all the more attention-grabbing since, in 2008, income annuity sales peaked right in step with the rest of annuity industry, points out Montminy.

Consumers tend to delay buying income annuities if they think the rates will go up the following year, adds Beacon’s Alexander. But the sales results show that income annuity sales were actually increasing despite the fact that interest rates were very low for the year.

What is going on?

Annuity experts are parsing the data, looking to see if it is aberration or part of an overall trend. Both Montminy and Alexander see it as a growth trend that will likely continue.

In fact, Montminy says he is expecting 10 percent to 15 percent growth per year for the next three to four years, as a conservative estimate.

Baby boomers are getting closer to retirement and fewer and fewer of them have traditional defined benefit plans on which to rely for guaranteed income, he points out. LIMRA studies have found that people — especially those in qualified retirement plans — tend to buy income annuities at key retirement touch points, he says.

The touch points include age 62 (the earliest age at which people can qualify for Social Security), Age 65-67 (full retirement age for Social Security purposes, depending on date of birth), and age 70 (when people must start taking required minimum distributions from their qualified plans).

Just over one half of qualified income annuity buyers were between ages 62 and 72, says Montminy.

The age 62 purchases probably include people who had been laid off and could not find new work, notes Alexander. Now, they are looking for something to add to their Social Security to increase their monthly income.

Another factor favoring growth is that a few big insurers are marketing the income annuity products and talking about them in the context of retirement income planning, she says. “For instance, one carrier in the Beacon database took a 26 percent share of estimated income annuity sales in 2010.”

Distributors are talking about the products in a retirement income planning context, too, points out Montminy.

The Beacon study found that large, regional broker/dealers were also ramping up sales.

Both Alexander and Montminy see favorable press on income annuities as yet another factor. That, plus a general decline in public concern about the long-term stability of insurance companies, is having an impact, Montminy suggests.

The products are changing, too. For instance, half of the carriers that are active in the income annuity market now offer liquidity features, according to Jafor Iqbal, associate managing director-retirement research at LIMRA. Some of these are carriers that did not previously offer liquidity features, he notes.

Related details

-- Income annuities in both studies include fixed immediate annuities and fixed longevity annuities but not variable income annuities.

-- Products that guarantee a lifetime income stream represented about 75 percent of all income annuity sales in LIMRA’s 2010 study, says Montminy. The period certain annuities, which guarantee an income stream for a specified number of years, represent 25 percent of sales.

-- There were more than 75 companies selling income annuities in 2009, according to Montminy. He says LIMRA does not expect the number to change very much for the 2010 data, which LIMRA is still collecting.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

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