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By Cyril Tuohy
Advisors have some work to do when it comes to explaining how much retirement income an annuity can provide as the vast majority of households have unrealistic expectations about how much in lump-sum premium is required to generate $500 a month.
Perhaps this discrepancy explains why so many American households are unprepared or underprepared for retirement. They simply don’t think they’ll need as much as they will require in order to generate the income they think they can get from retirement income products.
It’s the great disconnect.
Asked how large a one-time lump-sum premium a household would need to hand over to an insurance company to generate $500 a month in income for life beginning at the age of 65, 71.9 percent of respondents said $25,000.
The survey of active 401(k) participants 55 and older, conducted by Cerulli Associates, also found that 17.8 percent of households said a lump sum of $50,000 was necessary to generate $500 a month for life.
In addition, the survey found that 5.8 percent said $75,000 was necessary to generate $500 a month for life, 3.8 percent said $100,000 was necessary for $500 for life, and only 0.6 percent said a lump sum of $200,000 would secure $500 a month for life.
Even with the most aggressive single premium income annuity (SPIA), a $25,000 investment would generate less than $150 a month for a 65-year-old female, according to Cerulli Associates.
“In reality, even among the most aggressive SPIAs, the same 65-year-old female would most likely need to spend between $90,000 and $100,000 to generate the $500, without receiving a death benefit guarantee,” Cerulli said.
The findings, contained in a report titled “Annuities and Insurance 2013: Balancing Shrinking Supply and Increasing Demand for Guarantees,” show why annuities remain an “advisor-sold” product and why so few variable annuities (VAs) are sold directly to consumers, Cerulli said.
Consumers’ apparent ignorance of annuities speak to the “lack of how annuities function and the tradeoffs,” facing product manufacturers, Cerulli said.
Survey results also raise questions about how annuity companies can design the type of guaranteed income products that many Americans say they want.
Certainly, it’s not for lack of trying.
While VAs have struggled over the past several years, life and annuity carriers have come up with plenty of options: deferred income annuities (DIAs), indexed universal life (IUL) products, fixed index annuities (FIAs), contingent deferred annuities (CDAs), fee-based VAs and simplified VAs.
Some of these new annuity structures have been panned by financial commentators as too expensive. Other annuity products, commentators said, used properly, fill a need for need for guaranteed income which is growing every month with the retirement of the baby boomers.
In Congress as well, calls have grown louder for employer-sponsored retirement plans to provide more annuity income options.
Demand for living benefits, therefore, remains robust.
“Consumer demand for guaranteed income is too high for firms to ignore, and many believe they can address the opportunity with greater efficiency,” Donnie Ethier, associate director of Cerulli, said in a statement.
The question is what is going to happen to supply.
One of two insurers responding to the 2013 Annuities and Life Insurance Survey said they anticipate availability of VA living benefits over the next three years to shrink, compared to only 23.1 percent who anticipate living benefits availability to increase, the Cerulli report also found.
For the moment, living benefits in new VAs are in the midst of a contracting phase as annuity carriers reduce their guarantees or drop the outright to reduce VA portfolio exposures.
Down the road, Ethier said he expects legacy VA providers and new entrants “including nontraditional players,” to enter the VA marketplace, helped in part by stabilizing interest rates.
Carriers that have recently entered the living benefit space include New York Life and Forethought Life. Other annuity carriers such as Allianz and Nationwide have even enriched their guarantees, according to Cerulli.
Jackson National and Jefferson National, meanwhile, have pushed to include alternative investments and exchange traded funds in their VA platforms.
“While many people doubt the industry’s future, Cerulli believes that insurers will continue to reinvent products to meet consumer demand for guaranteed retirement income,” the report said.
Net new VA sales, which plunged to $14 billion in 2012, are expected to reach $22 billion by 2018, an increase of 57 percent from 2012, Cerulli said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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