Some things or people don’t need to be sexy. Like your grandma. You don’t want to think of her being sexy. There’s just no need for that.
Same thing with annuities. They are meant to be nice, dependable and boring. Boring is exciting when the stock market burns down. It’s reassuring when other retirement options destabilize. It’s the thing people can hang on to as their own while their employer or the government rolls back promises.
In this month’s feature article focusing on the annuity forecast for this year, I found some promising trends as well as a couple of trends that have some people concerned. Among the promising ones were the strong fixed index annuity (FIA) sales and the greater recognition of the importance of annuities in retirement planning.
In many ways, the time has arrived for the products. Baby boomers are hitting 65 at a rate of 10,000 a day, with trillions of dollars in retirement funds at risk for mishandling. And these folks have one shot to get their retirement income right. One false move, and it’s back to the job market for them, assuming they can work.
The door keeps widening for annuities to be the preserver of retirement security. One of the latest developments was the qualified longevity annuity contracts (QLACs) that the federal government released last summer. They are deferred income annuities (DIAs) for much later in life, after age 80, and would be funded with qualified money. QLACs also would be shielded from required minimum distributions.
At the moment, QLACs are open only to DIAs, which are not typically products sold in the independent insurance channel. Kim O’Brien, CEO of the National Association for Fixed Annuities, said her organization is asking federal officials to allow FIAs as QLACs also. That would certainly open up an opportunity but also would be a strong endorsement of the product.
I was not able to cover it in the feature, but another encouraging development is the growth of long-term care riders on annuities. As I have often written in our blog, long-term care costs are looming as perhaps the biggest threat to retirement security. Not only that, but the costs are draining inheritances for the next generation. Millennials are already struggling in the new economy. They don’t need yet another setback. So, annuities with LTC or similar riders will go a long way toward helping families with their real risk.
So, what were the troubling aspects? They had to do with a couple of growing trends: exotic indexes and uncapped potential. Almost everybody I spoke with for this article was worried about one or both of these. The new indexes are ones other than the Standard & Poor’s 500. They change things up, which is usually a good thing. Some of the indexes are interesting and a good alternative. Others are clearly gimmicky.
The gimmicks are of concern to David Callanan, a co-founder of Advisors Excel. Overseeing the nation’s largest independent marketing organization, he knows a thing or two about selling. He said the focus on accumulation in FIAs has overshadowed the essential function of providing income.
“Increased income is going to be extremely important,” Callanan said. “If you’re going to sell a 55-year-old an index annuity and you’re going to talk about doing an income plan at the age of 60, it’s important that they can get an increasing income.”
That would be a product that allows a client to increase the income every certain number of years of annuitization, which is a way of countering the effect of today’s low interest rates.
Low rates are the reason the exotic indexes and uncapped potential are being marketed. And LIMRA says that message is gaining popularity.
But people who know a lot more about these features than I do say the new indexes and uncapped promises don’t yield better results than the typical FIA. That is an unfulfilled promise. And that is contrary to the basic premise of insurance, which is built on the integrity behind the contract.
Tricky marketing, smoke and mirrors, have been partly to blame for the annuities’ bad rap. Why give detractors more ammo? These should be the times when people turn to the insurance community for security, not for sexy come-ons.
Callanan and his partners visit insurance departments and legislators to advise them about the important function served by insurance. And he hears concerns about marketing that threaten to draw attention away from the good things the industry does.
“As we’ve spent time visiting regulators, I do think the way these products are illustrated, back-cased and communicated to consumers for their performance has got to change,” Callanan said.
He and others would like to see the focus return to careful, predictable planning that sets clients on a road to a dependable retirement. Safe and secure. Isn’t that just like what you expect from grandma?