Sometimes, the least sexy of products is the right one for the client. That includes single premium immediate annuities–products that can provide annuitants with a guaranteed, fixed stream of income they can't outlive.
With the leading edge of 79 million boomers now entering retirement, sources tell Annuity Sales Buzz that they expect demand for this oldest of insurance products to rise.
"I think we'll see a significant increase in sales of immediate annuities because so many baby boomers are now leaving the workforce and many of them see that a SPIA can make good sense," says John Olsen, a chartered financial consultant and principal at Olsen Financial Group, Kirkwood, Mo. "The product is being perceived in a new light."
Demand will also be driven by uncertainties in the economy. Due to the prospect of recession, unsettled stock prices and still weak credit markets due to the sub-prime mortgage meltdown, many pre-retirees are looking for a rock-sold source of income to carry them through their golden years, say experts. The SPIA will have appeal because it can guarantee monthly payouts for a period of years or as long as the client lives.
But before buying a SPIA, clients also need to weigh the potential negatives, caution sources. These negatives include: loss of control of funds that might be needed to meet unanticipated expenses; loss of a death benefit (assuming a straight life annuity); and a locked-in fixed interest rate that could become an opportunity cost in a rising interest rate environment.
"There is a persistent belief among advisors and the public that purchasing a SPIA is a sucker bet because of the fixed interest rate and because the product binds clients to an irrevocable decision," says Olsen. "But these arguments miss the point entirely. The decision to purchase an annuity is never an investment decision; it's a risk management decision.
"The people who hate SPIAs say that [annuity buyers] are exchanging a stack of money, however invested, for an investment that provides an income stream and a low internal rate of return," he adds. "That's terrible logic. What you're actually doing is exchanging a stock of dollars for the risk management assurance that you won't run out of money."
Olsen is quick to point out that a SPIA is not for everyone. For instance, it is not well-suited to risk-tolerant clients who are looking for upside potential and are willing to bear the downside market risk inherent in a deferred variable annuity, he says. But it is appropriate for the client who has an immediate need for income, is risk-adverse, and has few if any other assets to draw on in retirement.
SPIAs can be especially attractive for those in ill health. Such individuals can seek a medically underwritten annuity that provides a higher income stream than is otherwise available, says Mai Luc, an annuity marketing manager at Brokerage Professionals, Scottsdale, Ariz. Because the individual has a shorter than average life expectancy, the payout (whether for a period certain or straight life annuity) will be greater.
