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FIAs: not your grandfather's annuity: how consumers can overcome risk aversion with today's new breed of products.

The financial crisis of 2008-09 forced many consumers to take a closer look at their complete financial picture--how they were spending their money, how much they were saving, and what they were doing with that money. In this new economic climate, the buzz word for many consumers has become "risk" rather than "growth," heightening clients' concerns about return of their money rather than return on their money.

Baby boomers in particular are analyzing their retirement options to determine how much risk they're willing to take in order to increase their savings--and with good reason, as the retirement planning landscape is a far cry from the old model that served previous generations so well.

Once upon a time, retirement funding consisted of one-third Social Security, one-third corporate pension, and one-third personal investments. But in 2010, this formula no longer works. Today, Social Security's solvency is at a crossroads with more than 70 million baby boomers who are retired or nearing retirement. Since corporate pensions and defined benefit plans are largely a thing of the past, employers are off the hook, as well. Thus, the onus is now on the individual to fund their retirement and ensure that those savings can help them maintain their lifestyle over a longer period of retirement.

As a result, agents are more challenged than ever to offer their clients retirement solutions that can guarantee income for life while allowing for the possibility of increasing income, which can help address such issues as inflation and rising health care costs.


Although an annuity can often meet these challenges, many agents are still hesitant to suggest one for their clients.

This is no doubt due to previous perceptions and ingrained attitudes about annuities that no longer apply. The annuity products of today have evolved significantly, even over the past five years. Simply put, the insurance industry must do a better job communicating that today's products are definitely not "your grandfather's annuity."

Annuities are long-term financial products designed to provide income during retirement, so liquidity has for some time been one of the product's shortcomings. This has been a major topic of concern for many clients who want income protection benefits but still need a reasonable level of access to their money. Past annuity designs with longer surrender periods just weren't attractive for agents who didn't want to tie up their client's money for long periods and burden them with early withdrawal penalties.

This is changing with today's annuities, particularly the new breed of fixed indexed annuities (FIAs) that offer surrender periods of six years or less. According to's 1Q 2010 Indexed Sales & Market Report, sales of products with surrender charges of less than six years now account for 12 percent of all FIA sales, at just over $818 million; this is up from 7.6 percent in the first quarter of 2009 and 6.5 percent in the first quarter of 2008.

On average, in 2008, quarterly sales of products with surrender charge periods of less than six years were 6.9 percent, but grew to 10.5 percent for average quarterly sales in 2009. Clearly, these shorter-surrender-period FIAs resonate with consumers, but perhaps more significantly, they serve as an entry point for agents who have been reluctant to offer FIAs--or annuities in general--to their clients because of liquidity concerns. The end result of this trend was a record year for FIAs in 2009, with more than $30.1 billion in sales.


Concerns about an unstable economy aren't going anywhere, and people are looking more and more for retirement planning strategies that can protect their savings. For agents, the key is to help clients think beyond the broad task of saving for retirement and encourage them to focus on planning for how they want to live once they do retire. New FIA product designs open up the door for agents to include annuities in their overall offerings and discuss the benefits with clients who want guarantees.

In addition to offering clients more liquidity, these new FIAs may also address the need for increasing income, which is becoming more crucial as such issues as longevity, high health costs, inflation, and equity market volatility continue to cut into savings. Income riders, available with many FIA products, are becoming more popular, and demonstrate how annuitization is not the only way to achieve lifetime income. More than half of FIAs sold in the first quarter of 2010 included a guaranteed lifetime withdrawal benefit, which not only addresses the need for lifetime income, but also provides the client with additional access to any remaining contract value in situations where they need additional liquidity.

A recent study by Allianz noted that four times as many consumers prefer an annuity-like product (4 percent return, guaranteed not to lose value) over one that resembles a mutual fund (8 percent return with the possibility of losing value), so it's clear that the demand is there. The next step is for agents to make these products available to their clients, and hopefully, newly designed annuities will be the entry point for agents who were previously on the fence.

IRI: Annuity Benefits Become More Generous

The Insured Retirement Institute (IRI) recently released a report on product trend updates within the U.S. variable annuity market for the second quarter. Compiled by Advanced Sales & Marketing Corporation, the report found that while the vast majority of changes to contracts were minor, carrier filings during this period reflected a swing toward more generous benefits. Among those filings, benefit withdrawal percentages were enhanced anywhere from .25 percent to .50 percent.

Overall, carriers filed more than 70 changes in the first quarter, compared with 140 in the previous quarter. In addition, year-to-year quarterly product changes decreased by 33 percent, dropping from a near-record-setting pace of 213 changes in the second quarter in 2009.

The report also found that the popularity of living benefits remained strong, especially the lifetime GMWB. Six out of the seven new benefits released this quarter were lifetime withdrawal benefits, with a typical lifetime withdrawal percentage for a 65-year old coming in at 5 percent. Additionally, the number of new contracts for the quarter was 15, compared with 26 filed in the first quarter.

Eric Thomes is senior vice president of sales for Allianz Life. He can be reached at or 763-765-5257.
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Author:Thomes, Eric
Publication:Agent's Sales Journal
Date:Sep 1, 2010
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