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Making income annuities irresistible: perceptions need to be changed to get advisors to recommend the product and grow sales.

WITH AN INCREASING NUMBER of new retirees, fewer traditional pensions and people living longer, the income annuity market has been poised for growth for many years. However, sales have yet to take off.

One key reason is that the products are not widely recommended by independent advisors.

The reasons for this may relate to compensation, liquidity or perceived value of income annuities. Still, some organizations are making progress in increasing income annuity sales. Here are some suggestions, based on their efforts. They fall into two areas--addressing perception vs. reality, and looking to new innovations and beyond.

Concerning perceptions, there are several issues to examine.

One is the perception that income annuities pay low commissions. The products do pay about half the percentage of commission that deferred annuities pay. However, the average income annuity sale is more than twice that of a deferred annuity, so the reality is, the advisor can expect to receive a larger average commission check from the income annuity sale.

Lack of liquidity is another issue. Most immediate annuities are considered irrevocable. However, the reality is that several insurance companies now offer, by contract, living "exit" strategies. These strategies allow an annuity owner to commute (surrender) part or all of the in come annuity as need arises, or under specific contractual conditions. Income annuities with death benefits offer similar commutation features to beneficiaries.

Perceived value is a recurrent issue. The advisor needs to ask, is there something better than an income annuity that will generate similar after-tax cash flow?

The reality is that an income annuity provides "certainty" in a world of maybes. As life expectancy continues to increase, the selection of a single life or joint life income annuity assures annuitants an income they cannot outlive. When a client asks about the "internal rate of return" of the proposed life income annuity, the advisor should ask the client how long he or she plans to live. Remember, these products have an assumed interest rate based on the annuitant's life expectancy; however, the rate will increase if the annuitant lives beyond his or her projected life expectancy.

Concern about inflation does come up and it is a very real issue. The advisor needs to point out that, to protect "put chasing power," the client can add a cost of living inflation rider. This rider increases annuity payments over time. Variable annuities with floor payments have been around for some time, prompting the relatively new fixed income annuity with a floor and an equity index account kicker as a way to offset the effects of inflation.

What about tax concerns? If that is an issue for the client, consider using a split annuity (part income annuity and deferred annuity) to create tax-advantaged cash flow for five to 10 years or more.

What about IRA Required Minimum Distributions? Income annuities are ideal for RMD simplicity. When a single life or joint life income annuity, or single or joint life income annuity with period certain is used for RMD, using IRS guidelines, annual calculations are not needed. That's because the income annuity payments are deemed to meet RMD requirements.

In addition to addressing these various perceptions, financial advisors can increase their income annuity business by bringing new income annuity innovations into the practice. There are several to consider.

For several insurance companies now offer health-rated or impaired risk income annuities. These annuities can provide for a higher monthly income based on a client's "health" age vs. actual age. The health age is derived through medical underwriting to determine health or medical age.

This medically based age rating allows the insurance company to rate the client as "older" than his/her physical years, thus decreasing life expectancy. The result is increased monthly income from the annuity.

In addition, some insurance companies are experimenting with different names for income or immediate annuities, using names that might better attract the consumer's attention. For example, consider "CIA" for current income annuity.

Another concept on the horizon takes into account indirectly issuing more income annuities by selling more deferred annuities with an "ADL" surrender waiver to an ADL-rated income annuity.

This concept is a carry-over from a feature of most long term care insurance policies. The term ADL stands for activities of daily living. ADLs include being able to dress or feed oneself. There are normally six ADLs listed. If the client is unable to perform two of the six ADLs, this generally triggers the beginning of a benefit period.

Applying this to the income annuity, advisors should know that substantial statistical data already exists concerning the "health age" of a person vs. actual age, correlated with the number of ADLs a person is unable to perform. (This data now is held by LTC insurers.) Now, consider a fixed deferred annuity owner whose policy has a one-year nursing home waiver of surrender charges. An additional provision could be added to the policy that would allow this person to convert the deferred annuity to an income annuity that is based on the health age of the client. This conversion could occur under the same terms as the existing nursing home waiver. The potential benefit to the consumer could be a higher payout based on health age and ADLs rather than actual age.

Bottom line: This concept--which is in development now--would give the owner more potential income bang for the annuity dollar. It also opens a largely untapped market for annuity agents to go after, since no preliminary underwriting would be required. In addition, the "ADL waiver" would be easy for the annuity owner to understand. The insurance company can control medical underwriting costs with this approach, though it may still offer full medical underwriting for a more exacting medically underwritten income annuity quote.

Another idea is to be more flexible in the area of multigenerational planning and asset transfer. For instance, income annuity insurers should consider adopting multiple and contingent payee options, as well as restricted beneficiary riders. In addition, they should explore ways to offer beneficiaries re-priced payments of period certain balances based on the beneficiary's age instead of the standard options of ongoing payment stream of the deceased annuitant, or lump sum commutation. Such changes would give advisors more leeway in meeting client needs.

Finally, advisors should focus on effective communications to the public about the features and benefits of income annuities. This can be done via traditional methods, like news articles and paid advertising. However, considering that many consumers do their research through the Internet, advisors also should look into promoting income annuities on their own websites.

THE NEGATIVES

PERCEPTIONS NEEDING TO BE ADDRESSED

* Income annuities pay low commissions

* Lack of liquidity

* Perceived value

* Can't keep pace with inflation

* Tax concerns

* IRA Required Minimum Distributions

THE POSITIVES

INNOVATIONS TO BE CONSIDERED

* Health-rated or impaired risk income annuities

* Experimenting with more attractive names for the product

* Selling more deferred annuities with an ADL surrender waiver to an ADL-rated income annuity

* More flexibility in the area of multigenerational planning and asset transfer

* More focus on effective communications to the public about income annuities' benefits and features

James P. Pedigo, CLU, ChFC, CASL, is an annuity and life distributor, and executive vice president of Financial Rate Watcher$ Inc., Longwood, Fla. He can be reached at FRWAnnuity@aol.com.
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Comment:Making income annuities irresistible: perceptions need to be changed to get advisors to recommend the product and grow sales.
Author:Pedigo, James E.
Publication:National Underwriter Life & Health
Article Type:Cover Story
Geographic Code:1USA
Date:Feb 6, 2006
Words:1212
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