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Why People Buy Fixed Annuities
Why People Buy Fixed Annuities
By: Facts About Fixed Annuities
www.fixedannuityfacts.com
What makes fixed and fixed indexed annuities so popular?
They offer a unique and attractive blend of safety, growth potential, tax advantages, lifetime income, liquidity, and estate advantages.
Safety
The top priority for most people when they are saving their money, without question, is safety. No one puts their money in a place where they expect to lose it. They put their money in a place where they expect to get it back one day, hopefully with some nice growth. The great thing about fixed annuities is that they uniquely offer three levels of protection.
1: By contract, a fixed annuity guarantees that your principal is protected and that you can get it back again, as long as you avoid any penalties for early withdrawal.
2: Even if your insurance company fails, the value of your annuity (up to $100,000, or more in many states) is guaranteed by your state insurance guaranty fund.
3: If you have a problem with the insurance company that issued your annuity and you want to get a regulator involved, no matter where that insurance company is located, the regulator is located in your home state.
So, with these three levels of protection, fixed annuities offer excellent safety.
Growth Potential
Once people are satisfied that their money is safe, the next objective is to have that money grow as fast as possible. Many carriers offer annuities with very attractive rates of interest. And, the annuity industry invented index annuities precisely so that they could offer even better rates of interest under certain conditions.
Tax Advantages
People want their money to grow as fast as possible, and besides having a high rate of growth, having some sort of tax advantage helps to accomplish that goal. Annuities have a tax advantage, and that is better than no tax advantage. Some people buy annuities for their tax deferral.
Lifetime Income
Fixed Annuities Complement Investment Planning
NAFA
National Association for Fixed Annuities
Article By: Kim O'Brien, Executive Director, NAFA
The investment community has historically used fixed annuities as a stable value component of an integrated investment strategy. Now, two recent innovations within the fixed annuity insurance industry are expanding the role of these products. These innovations provide new opportunities for financial advisors to diversify risk and complement the investment side of an individual's retirement plan with guarantees and insurance.
These new types of annuities are deferred lifetime annuities and fixed annuities with long-term care benefits.
The Challenge of Retirement Planning
To understand how these annuities are used, it is helpful to examine the core challenge facing retirees and individuals planning for retirement. To retire with confidence, most retirees need:
(a) Sufficient income to cover their expenses,
(b) Income that increases over time to bridge the gap between Social Security and any other income,
(c) Certainty that they cannot outlive their income,
(d) Emergency income for long-term care or assisted living assistance, and
(e) Discretionary income for travel, vacations, weddings, and so forth.
An investment portfolio can create a desired income and provide of the potential for value and income growth over time. However, without an insurance portfolio, the investment-only portfolio creates uncertainty and troubling variability for clients. Plus, when retirees don't prepare in advance, the cost to add solutions to provide for these contingencies increases significantly year after year.
Dealing with Longevity Risk
Fixed Annuities: The Missing Piece of Your Retirement Planning Puzzle?
By: Doug Lockwood
US News MONEY
Increasingly, the responsibility for funding a comfortable retirement is shifting from the employer and the government to the individual. Many people contribute to employer-sponsored retirement plans and IRAs, but there is another tax-advantaged retirement vehicle that shouldn't be overlooked: annuities.
Annuity essentials
An annuity is a contract between an individual and an insurance company. They're long-term, tax-deferred investment vehicles designed for retirement purposes. In exchange for purchasing an annuity (either through a lump-sum payment or through periodic installments), the buyer receives a regular payment during retirement.
A fixed annuity essentially earns a guaranteed rate of interest for a specific period of time. Likewise, the amount of the benefit paid out at retirement is fixed. This feature can help when planning a budget for your later years because you'll know in advance how much regular income you will receive. However, in exchange for less risk, the fixed annuity buyer gives up the potential for a larger investment return. Conversely, a variable annuity allows the buyer to choose from a variety of investments that will change in value. A variable annuity buyer takes on more investment risk in exchange for greater growth potential.
Breaking down fixed annuities
Diamonds Are Forever...So Are Annuities
By: Raymond J. Ohlson
annuitynews.com
Most people marvel at the lighthouse, a simple structure that played such a big role in navigating the sea. The lighthouse was designed to emit a beacon of light as an aid for ships at sea or on inland waterways.
Lighthouses have marked dangerous coastlines and provided safe entry into harbors. The personal pension plan does much the same regarding retirement income. It helps you avoid the dangerous financial reefs and the turmoil and destruction that can follow.
The old retirement model of past generations is gone. Back then, along with the gold watch, the company expected to pay retirement benefits for only three to four years. My, how things have changed.
Today’s retirement can last 25, 30, 35 years or more. The new retirement model is all about longevity. That is why the personal pension plan, a non-qualified program, is important in assuring that today’s retirees have an income guaranteed long after the gold watch has quit working.
First, we must start out by asking our clients the following questions:
1. What type of lifestyle do you want to maintain during retirement?
2. What life income is available to support that lifestyle? (Pensions, Social Security, 401(k))
3. What amount of essential and discretionary income do you need?
4. What financial lifeboats are available to sustain your lifestyle should the unforeseen occur?
5. Finally, how much do you need and when do you need it?
That’s the beauty in helping your clients develop their own personal pension plan. It is not a one-size-fits-all model. It is all tailored to their needs and desires. There are no wrong decisions. Most importantly, the personal pension plan is designed, funded, and implemented with fixed guaranteed products. No wishing and hoping, no gambles, only guarantees.
The personal pension plan provides a stream of income for as long as your client’s retirement journey takes, and not only for your client. If they have a spouse … he or she is afforded the same comfort.
It appears that the majority of Americans are not very positive about the prospects of having a secured retirement. Even for those lucky enough to have pensions, they know it is unlikely to be sufficient.
We have all been operating off the same three-legged stool concept that has been used for generations.
Annuity Industry Crystal Ball
5 Predictions for the Year Ahead
Article By: Eric Thomas
In trubulent economic seas, annuities provide a safety net.
With 2011 in the rear-view mirror, what can the annuity industry expect in 2012? It’s pretty safe to assume that the economic roller coaster we experienced last year will continue, and that will no doubt pose challenges for financial professionals who sell annuities. However, the high level of economic uncertainty that flows into 2012 also provides ample opportunity to communicate the true value of annuities and their role in a well-rounded retirement portfolio. With that in mind, here are five predictions for what our industry can expect in the coming year.
1. Continued low interest rate environment. It’s likely that the historically low interest rates of 2011 didn’t inspire many people to invest in “safe” products that were‑as of the end of December‑yielding just over 1 percent or less. It’s possible that some of that money earmarked for guaranteed financial products could have gone into other vehicles that could potentially provide higher returns. But that didn’t necessarily happen, as the annuity industry experienced what will likely be a record year. So why did people stick with annuities?
It seems that people are finally starting to understand that saving for retirement isn’t just about making money‑it’s also about not losing the money you already have saved. If 2011 taught us anything, it’s that we can’t predict how the economy will perform and how factors like a soft economy will affect interest rates. Our industry has done a better job of communicating this fact of late, and will need to continue this work in 2012 as it appears interest rates won’t get any better, at least in the short term. Despite this low interest rate environment, we believe annuity products remain an attractive option for consumers looking to protect a portion of their retirement savings.
2. Continued market volatility. This goes hand-in-hand with the low-interest rate environment and was something that simply couldn’t be ignored in 2011. In today’s media-driven society, market conditions are largely dictated by what people read in the news. Last year, there certainly weren’t a lot of positive headlines. Between the debt crises in the United States and Europe, minimal job growth and fears of a double-dip recession, domestic and global economic news left the average investor confused at best. The danger with that scenario is that people often don’t know what to believe. Without the guidance of a trusted financial professional, many may be content to let their money sit on the sidelines.
It’s likely that the type of market volatility we experienced last year will continue in 2012. Again, this can actually be more of a positive than a negative for the annuity industry. Our clients will most certainly see troubling news headlines throughout 2012, but with a proper understanding about the benefits of annuities, they don’t need to get caught up in the media hype. More education about our products in 2012 will support clients so they aren’t chasing returns when the market is up or panicking when things are down.
Wall Street Sees the Light on Indexed Annuities
Sheryl Moore, The Indexed Expert
Article By: Jack Marrion
As index annuity sales grew after the millennium bear market, Wall Street and its minions bombarded securities regulators with exaggerated stories of index annuity sales abuses and how agents needed to be stopped. In truth, there were sales abuses, but never even close to the extent that the naysayers proclaimed. Because the annuity industry remained silent and let the securities industry write the story the media was full of tales‑actually a few tales repeated ad naseum‑of how bad index annuities were. The result was SEC Rule 151A, which would have killed index annuities. However, the annuity industry finally rallied and managed to kill the rule instead; meaning index annuities would still be competing for consumer dollars.
Liquidity: Annuity Buyers Want It but Most Don's Use It.
Article By John Diehl
The Great Annuity Rip-Off… Annuity Fraud … Variable Annuities: Invariable Gullibility
These headlines, taken from different articles about annuities in the personal finance media, illustrate a bias against these retirement savings and income products. Few financial writers have embraced annuities as a financial planning tool; some have been downright hostile to the concept.
But anyone who sells annuities knows two things to be true: annuities can deliver significant value to clients and they are also one of the most misunderstood financial products on the market. Perhaps that’s why it was such big news when the Government Accountability Office (GAO) weighed in on the topic and extolled the value of annuities to retirees.
The GAO, in its June 2011 report to the U.S. Senate’s Special Committee on Aging, helped lift what some viewed as a dark cloud around annuities by making several specific recommendations to help protect or improve retirees’ lifestyles:
Middle-income retirees should consider converting at least part of their savings into an inflation-adjusted annuity or choose a guaranteed stream of income from an annuity instead of a lump-sum from their employer-sponsored defined benefit plan.
As life expectancies increase, Americans should consider putting off retirement until a later age, continuing to work and save, if possible.
Americans should consider taking Social Security payments at a later age, say age 65 or 66, when they are eligible for full payments. Nearly three in four Americans begin taking income from Social Security when they turn 62 instead of waiting until age 65 or older to begin taking full benefits.
Insights into the annuity puzzle
By: Shlomo Benartzi
Investmentnews.com
Why do most people love pensions but hate annuities? That, in essence, is the “annuitization puzzle” spoken of by Franco Modigliani, a Nobel laureate in economics. He noted that other than in the form of group insurance through pension systems, annuity contracts are extremely rare.
Twenty-five years later, the puzzle remains. Rational choice theory predicts that at the onset of retirement, households will find annuities attractive because they address the risk of outliving one's income. But relatively few people choose to annuitize a substantial portion of their wealth.
Adding some behavioral factors only deepens the puzzle, since annuities (in this case, immediate-payout annuities, not variable annuities used as an investment vehicle in the accumulation phase) have the potential to solve some of the complex problems with which individuals struggle, such as when to retire and how much can be spent each year in retirement, and thus might be expected to be attractive for that reason.
There is now substantial literature on the behavioral economics of retirement saving, which has stressed that both behavioral and institutional factors play an important role in determining saving accumulations. Some of these factors also are important in explaining why there seems to be so little demand for products that annuitize wealth at retirement.
LACK OF SAVINGS
One simple reason is that many people simply have not saved up enough to make buying an annuity a viable option. The sizable portion of households with little or no wealth at retirement is, in essence, completely annuitized since their only source of income is Social Security. For this segment of society, there is no annuity puzzle, although there is probably a savings puzzle.
But even among households that do accumulate enough in their retirement accounts to make an annuity feasible, one is rarely chosen. Is the low annuitization rate a reflection of underlying preferences or features of the choice environment?
This question has important practical implications, because in most retirement plans, when an employee stops working and is interested in investing part or all of the balance in an annuity, he or she has to shop actively. Remember, few defined-contribution plans offer annuities. Owners of individual retirement accounts are in the same boat; they have to look actively for annuity products if they want to ensure lifetime income.
Researchers have looked at these situations to see whether retirees become more interested in annuity products when that choice is easy to select.
Liquidity: Annuity Buyers Want It but Most Don's Use It.
By: Linda Koco
annuitynews.com
Liquidity features may be the apple of the annuity buyer’s eye – but relatively few policyholders actually use them, according to advisors.
“I think 99.9 percent of people have liquidity in their minds,” says Mark Lindsey, founder and producer with The Revolution FMO, LLC, Canoga Park, Calif. “However, most people never touch the money.”
In fact, Lindsey says, “probably less than 5 percent of all my clients have ever pulled any money out of their annuities.”
When clients do need to use their annuity’s 10 percent penalty-free withdrawal provision, they usually get their money within seven to 10 days, Lindsey points out. “But most don’t take the full amount. For most, 10 percent is more than they ever need.”
It Allows Access
Annuity liquidity refers to having access to a policy’s account value. The policyholder may have to pay a penalty for outing the money before the end of an annuity’s surrender charge period, but many annuities permit penalty-free withdrawals of up to 10 percent of account value a year. Many annuities also allow penalty-free withdrawals for specific reasons too, such as terminal illness, chronic illness and more.
(Note: Withdrawals made before age 59.5 may still remain subject to the Federal 10 percent penalty—on the gain in non-qualified annuities and on the entire account value in qualified annuities.)
Today’s challenging economy has heightened interest in liquidity. Many people hesitate to make long-term financial commitments without the back-door that liquidity provides. This has been widely acknowledged throughout the insurance sector as well as in the banking and general investment businesses.
Even the well-heeled private equity sector is remarking on this. For instance, SEI, Oaks, Pa., and Greenwich Associates, Stamford, Conn., reports that, in the wake of several years of underwhelming performance and lack of liquidity, many private equity fund managers are increasing transparency and decreasing fees to attract and retain skeptical investors.
In fact, a survey published this month by SEI and Greenwich found that half of equity fund managers named investor fear and reluctance as their biggest obstacle to raising capital – followed by performance (22 percent) and liquidity concerns (13 percent).
Meanwhile, institutional investors named liquidity terms and risk concerns as their biggest obstacles to allocating more to private equity, the SEI/Greenwich researchers say.
Liquidity Responses
A few annuity carriers have recently debuted products that take new approaches to providing liquidity.
How a Fixed Indexed Annuity Works
and Why is Your Money Safe?
By: Facts About Fixed Annuities
www.fixedannuityfacts.com
A lot of people wonder if their money is really safe when they put that money in an annuity.
To ensure the safety of your money from market volatility, the first thing you have to do is look at the type of annuity you are considering purchasing. The type of annuity that we are discussing is a fixed indexed annuity, and money is protected from market losses in a fixed indexed annuity. The carrier that issues the annuity guarantees that your contract value never falls due to the associated index falling.
Contract Value
The money you put in the annuity becomes the initial contract value. The only way that the contract value can go down is if you withdraw money from the annuity, so let’s assume you make no withdrawals. Even if every financial market in the country plummets, your contract value stays exactly the same. It doesn’t decline.
Also, depending on the time commitment you are willing to make, some carriers offer products with a premium bonus that can be credited to your contract value as well. Currently, available premium bonuses can range from 5% to 11% of the amount that you put into your annuity.
Then, the annuity credits interest, typically annually on contract anniversaries. There is an index upon which interest crediting is based, and if that index goes up, interest is credited, and once it is credited, it becomes a protected part of the contract value as well.
Annuity sales in 2010 crossed the $200 billion mark and 2011 sales continue to climb in double-digit leaps. This is a good time to be an annuity seller and, with the dramatic stock market fluctuations of late, it's a good time to be an annuity buyer.
By: Allianz
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