NEW YORK—While annuity carriers and distributors continue to talk about the powerful selling tool of lifetime income, they continue to mistakenly focus on the short-term success of accumulation, Annuity Market News, SourceMedia’s leading trade publication covering the annuity industry, reports in this month’s issue.
As Baby Boomers begin to retire and their longevity continues to increase, the need for adequate income to last throughout their lifetimes will become ever more critical. In fact, that necessity is expected to attract billions of dollars to the industry. On the face of it, variable annuity providers appear to at least be giving lip service to the need for focusing on income. A survey by Diversified Services Group of Wayne, Pa., found an increasing commitment to investing in the retirement income market. In 2004, only 38% of companies said they were significantly increasing these investments. By 2006, that had risen to 57%, with survey participants pointing to Fidelity Investments and Merrill Lynch as having emerged as market leaders.
These two market leaders aside, carriers and distributors continue to sell annuities as tax-advantaged investments, focusing on that benefit’s current and continued success at attracting assets. But they do it at their own peril, for only the forward-looking carriers that produce not just income products but thorough marketing and educational campaigns—for investors and distributors alike—will succeed in gaining critical market share.
“The industry is still focused on accumulation,” said W. Bordon Ayers, a principal with DSG. “That’s its bread and butter, and it isn’t concerned about giving a lot of resources over to something else.” Dick Austin, a consultant who was president of Templeton Funds Annuity until 2001, agrees: “There’s a reasonable degree of comfort that what’s going on now is O.K., as long as bottom-line requirements are met.”
“The insurance industry has been its own enemy,” said Garth Bernard of Metlife of New York. “We have not educated producers about income annuities the way we educated them about deferred annuities.” For instance, despite the availability of cash refund options and periods certain, many providers still believe that income annuities don’t offer death benefits or liquidity, he said.
Bernard added that lower commissions on income products may also be keeping producers loyal to accumulation products, but he believes carriers will change that, perhaps through trailing commissions or some other innovation.
The industry will also have to explain the tax advantages of annuitization, added Lisa Plotnick, a partner at Cerulli Associates of Boston, noting that she never hears about the exclusion ratio on annuity payments, whereby the return on principal is not taxed.
Nonetheless, industry experts expect these issues to rise to the surface within the next five years, when the first wave of Baby Boomers turns 65 and the retirement wave begins. That’s when investors and the industry will be forced to move from thinking about accumulation to thinking about income.
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