By your observation, what products are generating the most interest (and sales) from producers?
Marrion
Although variable annuities still lead sales, according to Beacon Research reports, the annuities I’m hearing the most buzz about are structured variable annuities, also called registered index annuities or buffered annuities. In the agent channel fixed index annuities (FIAs) continue to lead.
Lane
For the past several months, MGYAs have continued to dominate Fairlane’s fixed sales, due to the significant increase in guaranteed rates. Our sales have tripled in MYGAs over last year. Indexed annuities with first year premium bonuses remain strong with a slight increase over last year, due in part to additional carriers raising their caps and spreads to buy market share.
What markets (age, affinity, affluence, life stage, etc.) are showing significant interest in annuities? Are any previously reluctant segments showing increased interest?
Marrion
Studies continue to show the primary candidates for deferred annuities are those ages 55 to 65 with a quarter million to a million in assets, and for immediate annuities the primary buyers are those in their mid 60s. New white papers show that millennials are generally more attracted to the income guarantees of annuities than older age groups, but this attraction has not yet translated into meaningful sales.
Lane
Our Programming and IT departments develop phenomenal reports for management that give us a good handle on what’s happening in the field. These reports show which producers are selling certain products and to whom they are selling (clients’ ages, zip codes, etc.).
We can glean from this data that Fairlane’s MYGA sales for 2018 are being purchased by seniors with an average age of 69. Last year the average age was 64. The average annuity purchase this year is $67,000, compared to last year’s sale of $58,000.
It’s hard to discern whether affluence plays into the sale, but our feeling is this age group and older consumers had been waiting on the sideline for rates to increase. Their CD and money markets are less attractive and MYGAs offer the “sacred” rate guarantees that they covet.
Equity markets that have been a mainstay for many seniors are being challenged by today’s higher interest rates and global corrections. Our data shows more seniors are purchasing fixed products with shorter surrenders (3-5 years). Yesteryear’s reluctance to fixed annuities is vanishing. Higher, guaranteed rates are very forgiving.
What answers can producers offer to offset consumer concerns about surrender charges and/or lack of liquidity in a still relatively low interest rate environment?
Marrion
Unless the carrier is in receivership there is almost never a lack of liquidity with deferred annuities, but there usually is a cost of liquidity; a surrender charge. Agents need to get the consumer to look at the big question which is, “Looking at all of your assets will there likely be a need to surrender the annuity?” If the consumer understands they probably won’t need the cash in the near-term, the surrender charge becomes less of an issue. The consumer also needs to look at the opportunity cost of not buying the annuity. Putting $100,000 into a two percent money market produces $8,243 in four years. Putting the same amount in a fixed index annuity with a five percent cap can credit $10,250 even if the FIA records zeroes half of the time and $15,762 if the cap is hit in three of the four years.
Lane
The answer to surrender charges is simple. The insurance carrier has to invest the annuity owners’ monies into matching duration assets. This guarantees that the carrier can pay the annuity owner the promised account value at the end of the surrender period. If the annuity owner wants/needs their monies prior to the stipulated surrender period, in theory, the carrier must liquidate the investment asset early and would lose future gains. Hence, they pass this loss to the owner in the form of a surrender charge.
The consumer can equate the surrender charge to their CD. If they liquidated their CD early, usually the accrued interest is lost but they would have their principal. We have “return of premium” annuities too, but rates aren’t as attractive. Recently, the low interest rate environment has received a shot-in-the-arm from the Fed.
The liquidity factor should be discussed and exposed. The carriers assume the consumer has been apprised of the annual withdrawal options by their agent as part of the presentation and application process. We have carriers that offer an accumulated (50 percent) withdrawal during the surrender period.
Living benefit riders continue to appeal to producers and clients. What has been your experience with these and other lifetime benefit options?
Marrion
The variable annuity world has done a better job in positioning lifetime income riders as income tools; independent agents tend to focus on the roll-up rate. The big story here is not “you can earn a six percent roll-up rate” but “you will receive $12,000 a year at retirement guaranteed for life and you keep control of the asset.”
Lane
GLWB riders continue to be popular amidst rising rates. We’re selling indexed annuities that will offer the highest payout to the client to help them set a floor for their retirement. They like the peace of mind that they can’t outlive that money and the rider fee is insignificant to those who understand this benefit. Laddering these indexed annuities is a popular strategy that can create payment streams at different times and protect against inflation.
Those concerned with liquidity for long term care can achieve peace of mind with living benefit riders. Clients can access up to 100 percent of their money in the event of confinement in a nursing home or terminal illness. The aforementioned GLWB riders may double your payment for a period of time to provide extra money for long term care costs as well. These riders, coupled with rising rates, are driving annuity sales as a supplement, or alternative, to traditional long term care policies.
With interest rates edging up, what is your forecast for the annuity business through 2019? What current product types might see an upswing and what, if any, innovation might be on the horizon?
Marrion
All annuity sales will increase from now through 2019. Rising rates means multi-year annuities should maintain a competitive advantage over most bank savings vehicles and increasing stock market uncertainty leading to a bear market will especially encourage the purchase of fixed index annuities and structured variable annuities. There will be incremental changes in annuity products, but no true innovations.
Lane
If higher rates continue into 2019, this will be the bellwether consumers respond to. Fixed indexed annuities with first year bonuses will be in vogue too. The MYGA arena has exploded during the last several months due to higher rate offers like 4.10 percent guaranteed for seven years. Look for new fixed products next year with enhanced death benefit riders available.
Some carriers are reintroducing long term care riders, but producers haven’t seen a renewed interest. The older clients that want the riders find it too expensive. Perhaps somewhere down the road we’ll find a happy medium in benefit vs. costs. Stay Tuned!
