The big question: will new retirees actually 'annuitize' their annuities?

U.S. life insurers have been adding attractive features to their annuities in an attempt to gain a greater share of the trillions of dollars in assets held by the people who are planning to retire over the next 20 years.

Insurers promote annuities, which allow people to invest and grow their money tax-deferred, as the only financial product that guarantees an income stream for life. But historically, only about 5% of people who buy annuities actually "annuitize" their contracts, said Jeffrey Voudrie, president of Legacy Planning Group, a Tennessee-based money management firm. The American Council of Life Insurers confirmed that figure.

Simply defined, annuitize means "to convert a stun of money into a series of payments." When people annuitize, they give up their assets, which can be $100,000 and greater, to an insurance company in return for guaranteed income payments.The industry is "touting a feature they know 95 people out of 100 aren't going to use," said Voudrie, who's also the author of the syndicated column, Guarding Your Wealth.

But when John Amann, chief operating officer of Allianz Income Management Services, the U.S.-based unit of Germany's Allianz, was asked why most people haven't annuitized, he said, "Could the answer ... be that most baby boomers have yet to retire? Why would they want to start an income prior to the time they retire?"

Amann said many workers are still in their asset accumulation phase and have yet to put the contract into payout. Outside of the boomers, few other demographics own annuities.

"Annuicide" is the term some registered representatives and investment advisers use because they and their clients fear losing control of the asset once a deferred annuity contract is annuitized, said Jeremy Alexander, president of Beacon Research, a firm that tracks fixed annuity sales. But the representatives and advisers "also lose the chance to earn asset-based fees or commissions," he said.

Phil Eckman, president of Transamerica Retirement Management, a new unit of Aegon USA, said riders added to variable annuities, such as the guaranteed lifetime withdrawal benefit and guaranteed minimum withdrawal benefit, are innovations the industry developed over the past few years to address the problem of people not annuitizing their contracts.

With a guaranteed lifetime withdrawal benefit, people receive a guaranteed stream of income for life without giving up control of their asset, Eckman said. Here's how it works: A person with $100,000 in a variable annuity activates a withdrawal-benefit rider. The insurer guarantees that the annuity holder can withdraw 5% of the benefit base every year whether that person lives 10 or even 40 years from the time of the initial deposit, he said.

That income stream continues "even if the stock market falls apart," Eckman said.

The appeal of annuities, especially variable and equity-index annuities, "is the marketed layer of protection they offer stock market investors" said Voudrie. "Thus the sales of these products is predicated on the fear of investors sustaining large losses using traditional stock-market-based investments," he said.

What few investors realize, though, is that there are many ways in which market risk can be substantially minimized through different management strategies, he said.

"Which would an investor rather have--an annuity with years and years of substantial penalties or a fluid investment where market risk is aggressively managed?" Eckman asked. He said his experience is that once an individual investor understands these things,"they will choose the latter."

Sales of variable annuities were up 6.9% in the first quarter to $40.9 billion, according to Morningstar and NAVA, but net flow--a key measure of whether "new money" is being invested in variables--continues to disappoint.

"There's always going to be an agent out there hunting for a commission that's going to show you why his product is so much better than the one you have," Voudrie said, noting a possible reason why people aren't annuitizing. "It's just a way to milk more money out of the same customers," he said. "Company A is getting some of B's customers, Company B is getting some of C's."

Alexander is optimistic. Boomers will annuitize "because they'll need the income and will like the security of receiving a regular check," he said.

Listen to the full interview with Jeremy Alexander at www.bestdayaudio.com.

By the numbers

Record Sales For U.S. Annuities

$236.2 Billion

The record-high figure for 2006 annuity sales, which was a 9% increase over 2005.

$58.9 Billion

Annuity sales during the fourth quarter of 2006, also a 9% year-to-year increase from 2005.

17%

The increase in variable annuity sales for the fourth quarter of 2006.

6

The number of consecutive quarters in which variable annuity sales increased compared with the prior year's quarter.

Source: Limra International