Annuities can be great investment tools. And with a younger crowd stepping into the early retirement planning realm and later generations living longer, there are a lot of investment opportunities to go around.
But annuities can be complex, nuanced and confusing.
Annuity advisors are mandated under federal law to clearly explain these investment products to ensure a level of trust between the insurer and the consumer.
That’s why National Annuity Awareness Month – held annually in June – is a great opportunity for agents and consumers to get up to speed on these highly customizable investment tools.
And with the federal government continuing to push back the age to cash in on Social Security benefits, now is the perfect time to educate people of all ages about ways to live out a comfortable retirement.
Annuity Sales on the Rise
This is a prime time to be selling fixed-indexed annuities (FIAs). This type of annuity derives its gains from market growth. In addition, it returns a minimum guaranteed rate of interest over a fixed number of years. This is a savory point for more skittish investors.
Sales of these investment gems have been increasing over recent years due to investor concerns about unsteady stocks. FIAs offer these wary individuals full protection of their principal paid into the benefit, making it a low-risk investment.
FIA sales were up by almost 5 percent in the first quarter of 2015 compared to one year earlier, according to Wink (an analytics firm).
There are several drawbacks to FIAs, though, that should be clearly outlined for consumers. FIA investors should understand that they will not be receiving stock market returns. So, if they’re looking to play fast-and-loose with their money in hopes of heftier returns, an FIA isn’t the way to go.
Millennials Getting in on Investments
The low-risk strategy of fixed-indexed annuities (FIAs) is a primary reason why author John Spooner says millennials should avoid this type of investment. They are typically saddled with debt and little left over for savings after paying their bills, said Spooner, managing director of wealth management at Morgan Stanley.
The younger members of the workforce should look for opportunities to invest in “growth and liquid growth, not locked into any contract,” Spooner told USA Today.
Younger workers should be encouraged to take advantage of the time they have with riskier investment strategies, according to Spooner, author of – No One Ever Told Us That: Money and Life Letters to my Grandchildren.
Spooner’s objection comes at a time when this younger age group is more interested in annuities than investors of all other ages.
One poll found that over half of millennials were keen on learning more about the investment strategy behind annuities.
One personal finance expert attributes this increased interest among millennials to “a real mistrust of investing in the market.”
David Weliver, founder of personal finance site Money Under 30, says this may be due to younger individuals in this age bracket watching their parents lose a significant chunk of their retirement savings during the Great Recession.
This doesn’t guarantee, though, that millennials will be buying annuities any time soon.
Annuities are still primarily sold to older investors with the average age of consumers settling in around age 62.
This is, however, a drop from the 2014 first-quarter average age of 64.
More Consumers Outliving Benefits
Most people aim to live a long, full life. But for an insurer, consumers surpassing average life expectancies can equate to unrealized risk.
Likewise, typical death-rate improvements could be about 1 percent per year, according to 2018 estimates by the Longevity Risk Task Force of the American Academy of Actuaries (AAA).
This task force is working on the development of a tool that can help insurers build annuity longevity risk protection into their risk-based capital (RBC) ratios.
This is a rough indicator that can give information on an insurer’s preparedness to deliver the benefits it has promised to provide.
Life expectancies of annuity investors can partly depend on one’s career and lifestyle choices. Typically, though, people who buy annuities with lifetime income streams are expecting to outlive the average American.
Poor advice and planning can erode trust over time. Knowing how longevity trends change over time and understanding the mitigating factors that contribute to this trend can keep insurance agents from over-promising and under-delivering.
Selling Longevity Annuities
One way to protect your clients against a shortage of benefits later in life is to offer a longevity annuity. This type of annuity is designed to prevent consumers from outliving their available investment monies when life expectancy exceeds one’s expectations.
This late-in-life investment is also referred to as an advanced life delayed annuity. Investors must wait until at least age 80 to tap into the asset. The downside to this is if your client dies before payouts begin. Their heirs will be left with nothing.
But since it is a longevity annuity, for those who do live beyond the average life expectancy, this type of annuity can be a beneficial supplemental retirement investment. A longevity annuity will provide a guaranteed regular amount of income for the remainder of the investor’s life. The longer one waits to tap into it, the larger the payouts will be as well.
Since this is considered a supplemental asset, though, it is wise to advise your clients to invest only a small portion of their full retirement funds into this type of investment. Usually, only about 10 to 25 percent is sufficient.
Annuity.org's mission is to help you through tough financial situations. We’re committed to providing this help the best way we know how — through informative, easy-to-understand articles. Annuity and structured settlement owners can use our website as an educational tool and vantage point for connecting with our trusted partner, CBC Settlement Funding, to sell their payments for cash. Founded in 2004, CBC Settlement Funding is an annuity purchasing and pre-settlement funding company based in Conshohocken, Pennsylvania. CBC works with a variety of financial products, such as annuities, structured settlements, casino payouts and lottery winnings.
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