When annuities first entered the American retirement-planning arena, their popularity grew largely based on their tax-deferral and income-guarantee features. The death benefit was another standard feature that helped annuities win fans. Today, the annuity evolution continues as carriers introduce new features and riders in response to changing consumer demands.
Macrocosmic factors such as longevity risk, inflation, a questionable Social Security system and the individual's responsibility to prepare for their own retirement have forced annuity providers to come out swinging with what seems to be an endlessly innovative product lineup. And while these new features can help individuals better navigate retirement and mitigate risk, they have also at times created climates of misunderstanding for which the industry has been frequently criticized.
"The annuity industry has always been in a state of evolution," says Harley Kaplan, CFP in Sherborn, Mass. "The industry has had some issues to deal with. While it's come a long way there is still room for improvement." Kaplan cites the products' relative complexity along with a failure on the part of providers to adequately educate advisors regarding annuity features, as two big hurdles for the industry. "They've not shown the ability to position annuities as strategic investments," charges Kaplan. "Annuities have a lot of benefits but the providers need to do a better job explaining what they are and how to use them to help individuals prepare for a long-term retirement." Says advisor Michael Salley of Salley Wealth Advisors Group in Summerville, S.C., "I'd like to see a lower fee structure and ways to make it simpler to communicate the potential benefits of annuities. Annuities make up a large part of my practice because they can give each client exposure to nearly every asset class for the long term, plus the benefit of tax deferral. These can be critical elements of wealth building."
While they may not be perfect, statistics show more and more people are turning to annuities. U.S. individual annuity sales improved 4 percent to reach $68.4 billion in the second quarter of 2008, according to LIMRA. Sales for the first half of 2008 were up 7 percent over the first half of 2007, reaching $131.9 billion. The industry's response to this increased interest and its innovation in the face of changing consumer demands are the forces behind the evolution of annuities, and this trend shows no sign of slowing down.
"The questions are: What are the clients' needs and what can an annuity provide?" says David Byrnes, executive vice president and director of sales for Sun Life Financial Distributors. Factors driving the changes in annuities, according to Byrnes, include an increase in longevity, the need to offset inflation while providing income, and a competitive reaction among providers. "Features like the death benefit and tax-deferred accumulation are not the core reasons behind an annuity purchase. It's longevity insurance."
According to Laurence Greenberg, president and CEO of Jefferson National, which recently introduced the first variable annuity with a flat insurance fee, "Annuity products today are increasingly being aimed at specific markets. Historically they had been created with a broad appeal in mind. Needs are not universal. The benefits have been all about the riders and this has changed the nature of annuities. As 76 million boomers approach retirement over the next two decades, tax deferral is vital for helping them confront two urgent needs: how to save more and how to make it last a lifetime."
