Annuity Trends, Prospects, and Possibilities
by David Colburn, LUTCF

Life insurance was the focus product when I joined the industry in 1977. Some producers also sold disability income coverage. Long-term care insurance was in its infancy and few agents knew much about it and even fewer attempted to sell it. Oh, yes, there were also annuities, the all-but-forgotten product line. Just about their only use was to guarantee the payout on defined benefit pension plans. Thirty years later, annuities have emerged as a truly important tool in the financial planning process. There’s good reason for their prominent position since annuities offer the opportunity for tax deferral during accumulation and guaranteed tax-favored distribution.

They have a particular appeal to older consumers who want to take advantage of deferring income tax payments on their investments while attempting to grow their assets. With only limited possibilities to do this today, annuities are particularly appealing.

Annuities also address the understandable fear of many older Americans who are living longer than ever. Since many have one-third of their lives ahead of them, it’s not surprising that they are concerned about outliving their resources. This will become an even bigger issue over the next 25 years.
Annuities help relieve the worry of running out of money just when millions of consumers may need it the most. Annuities are designed to provide a guaranteed income stream for a designated period or for life.
As insurance carriers recognized the market potential for annuities, their shelves filled up with a variety of niche products. Since demand is expected to continue growing, we can expect to see the carriers introducing many more products to meet specific needs.

For example, the deferred annuity is a hot product for the over 70 age group and for 50-plus Baby Boomers. These consumers have funds they want to invest and grow until the money is needed.
Then there are variable annuity plans that allow numerous investment choices, although loss of principal is possible in a down stock market. Some plans guarantee a certain death benefit and income stream.

Equity index annuity plans guarantee as much as 3% for a specific period and credit additional interest based on various indexes, most commonly the S&P 500. Dividends are not included. A good result is 6% to 8% with minimal risk.
For the truly cautious, the companies offer CD-like plans with guarantees running from one to 10 years. They also offer guaranteed interest rates from 4% to 5%. These are all valuable tools for income planning.
It is nearly impossible to overstate the right to annuitize. While it is huge today, look for it to become even more important in the coming decades.

Single premium immediate annuities are being put to work in a variety of planning tasks. Here are a few examples:
• They can provide a guaranteed income to one or more annuitants for life or for a specific period.
• They can be used to guarantee a payment to buy a long-term care insurance plan or a life insurance plan. Several insurance companies offer rated or enhanced age plans for consumers with health issues.
• Several companies are adding an inflation feature with the benefit going up every year – anywhere from 3% to 5% simple or compound interest.
• Some insurance companies offer a long-term care rider. With minimal underwriting for morbidity, they promise to pay out more for long-term care than the accumulated amount in a fixed deferred annuity. To accomplish this notable benefit, they reduce the interest rate by a certain percentage to fund the long-term care provision.

Immediate annuities also work well as a way to purchase a one-pay long-term care insurance plan for a client and spouse. One insurance company offers a $7,500 per month plan with a simple inflation provision and a five-year benefit for about $700 a month to a couple in good health, ages 61 and 68. The cost is a deposit of approximately $127,000 for this couple to purchase a joint annuity promising to pay out $700 monthly for both their lives.
Another planning concept involves turning a deferred annuity, which the annuitant does not intend to spend during their lifetime, into a single premium immediate annuity. The income from this annuity is paid into a family trust so that it’s available to pay the premiums on an individual or survivorship life insurance policy. If this change had not taken place, the original annuity death benefit would have been part of the estate and would have been subject to income tax. On the other hand, the life insurance death benefit is estate and income tax free. This is sometimes known as “annuity maximizing” or “leveraging.” Finally, impaired risk income payments are adjusted upward to reflect the shortened lifespan. If a company determines that someone’s life expectancy is 10 years less than the life expectancy of a standard applicant, it will pay the life annuity out as if the applicant were 80 instead of the person’s actual age of 70. The substantially higher payment may even make is more attractive to purchase a rated life or LTC plan. It is sometimes referred to as an “impaired risk annuity.” It’s safe to assume that single premium immediate annuity plans that guarantee benefits for the life of one, two, or even more annuitants will become extremely expensive due to ever-increasing longevity. Consumers in their 60s or even 70s may find themselves in the strange position of being too young to get an affordable lifetime annuity. This is the price we pay for living so much longer today.

In the future, it may be prudent for consumers to split their assets with a portion of available funds going to a 10-year or 20-year specified payout period and the remainder to a deferred accumulation annuity. Then the accumulated sum can be used to purchase a new certain payout period annuity or a life only for the annuitant who is 90 or older.

Too often, advisors look upon an annuity as a standalone product -- a good, safe place for funds that can become an immediate or future income stream. However, advisors can use annuities in the planning process due to the proliferation of annuities designed to meet specific needs during periods of a client’s retirement years.
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David Colburn, LUTCF, is a brokerage manager at First American Insurance Underwriters, Inc., Needham, MA. He has 30 years of experience assisting producers with their life insurance & annuity sales. He can be contacted at 800-444-8715 or dcolburn@faiu.com.