Annuity myths, realities and opportunitiesArticle added by Bob Seawright on February 10, 2009
Bob Seawright

Bob Seawright

Joined: December 18, 2008

In 2005, the Gallup Organization published a comprehensive study of more than 1,000 owners of non-qualified annuity contracts designed "to obtain a profile of the demographic characteristics of owners of non-qualified annuity contracts and to gain insight into their attitudes toward a variety of issues relating to retirement savings and security, including how they save for retirement, what they think about saving for retirement generally, what sources of funds they used to purchase their annuity contracts, the reasons why they bought them, and how they plan to use them." *The Committee of Annuity Insurers, Survey of Owners of Non-Qualified Annuity Contracts (The Gallup Organization and Mathew Greenwald & Associates, 2005), p.4.

This study is the most recent of a series of studies on this topic from Gallup and provides a wealth of knowledge for anyone in the financial services industry, but for annuity producers in particular. Most importantly, the study illustrates a number of areas where the so-called conventional wisdom on annuities is wrong and reveals a number of tremendous opportunities. Some highlights follow:
    1. The age wave: Many producers believe that seniors are their primary -- or even exclusive -- market for annuities. However, the average age at which non-qualified annuity owners purchased their first annuity is 50. More than two-fifths (43 percent) made their first purchase when they were younger than 50. A similar share (40 percent) purchased their first annuity between the ages of 50 and 64. Only 17 percent purchased their first annuity at the age of 65 or older. Clearly, boomers are an appropriate and profitable market for annuity producers. Moreover, since the average age of annuity owners (66) is significantly higher than the average age of initial purchasers, it appears that boomers are not being adequately targeted by the industry's marketing efforts.

    2. Annuity "pack rats": Nearly all respondents (or their spouses) still owned the first annuity that they purchased (88 percent), which indicates that only a relatively small amount of owners have surrendered their annuities or exchanged them for new ones. Since annuity products are continually enhanced, and since clients' needs frequently change, these data suggest that producers are not staying in touch with their clients and ascertaining their needs as often as they should.

    3. Room at the top: Only 18 percent of non-qualified annuity owners had annual household incomes of $100,000 or more. This suggests that higher income prospects provide an excellent marketing opportunity, particularly given stock market volatility, the increasing emphasis upon the use of annuities in retirement to guarantee income, and the decreasing availability of employer-funded pensions.

    4. The fixed mix: The types of annuities held were evenly split between fixed (51 percent) and variable (49 percent), with a trend toward increased ownership of fixed annuities. Given recent market reversals, I would expect this trend to continue. Higher income families and men are more likely to own a variable annuity than lower income families and women, consistent with the conventional wisdom regarding risk tolerance.

    5. Event of a lifetime: The majority of annuity owners (58 percent) said that they used existing savings to purchase their annuities; half used current income (50 percent); nearly a third (30 percent) used investment proceeds; and 26 percent used inheritance income. Other "one-time" events that owners used to fund the purchase of their annuities were the sale of a home, farm, or business (14 percent); a death benefit from a life insurance policy (14 percent); a gift from a relative (13 percent); or a bonus from an employer (9 percent). Obviously, an advisor who stays close to his or her clients is far more likely to secure business arising from such one-time events. The large percentage of annuity owners who liquidated investment vehicles to purchase annuities suggests a major compliance risk for annuity-only producers.

    6. Draw poker: Three-in-ten annuity owners (29 percent) had withdrawn or received money in one form or another from an annuity that they (or their spouses) still own, beginning at the average age of 64. Overall, close to two-thirds of annuity owners (64 percent) had never withdrawn money from their annuities and are not receiving a regular periodic payout. Two in ten non-qualified annuity owners (22 percent) were currently receiving distributions from their annuity contracts on a regular or periodic basis. Eighty-five percent of those who were currently receiving distributions were 65 or older.

    7. Income wanted: Of those who had received one or more distributions from their annuities, 73 percent had annual household incomes below $75,000 and 27 percent had annual household incomes above that level. Of those who had neither withdrawn any amount from their annuities and are not receiving a regular payout, 59 percent had annual household incomes below $75,000 and 41 percent had annual household incomes above that level. These data suggest that the importance of using annuities to guarantee retirement income has been inadequately communicated to clients and prospects, particularly at higher income levels. Those who used market investments to fund retirement income needs -- an all-too common occurrence -- are obviously in deep trouble today.

    8. One product, several uses: Approximately eight in 10 annuity owners stated that they planned to use their annuity savings for retirement income (78 percent), to avoid being a financial burden on their children (81 percent), and to have as a financial cushion in case they or their spouse live well beyond their life expectancy (83 percent). Seven in 10 planned to use their savings as an emergency fund in case of a catastrophic illness or the need for nursing home care (70 percent), or as financial protection in case other investments do not do well or if inflation is very high (69 percent). Younger owners were more likely to say that they intend to use their annuity savings for retirement income (89 percent, compared to 71 percent of those aged 64 and older), and as financial protection in case other investments do not do well (75 percent, compared to 66 percent of older owners).

    9. How does that work again? More than half of annuity owners said that they are at least somewhat familiar with life annuities (55 percent), with 19 percent saying that they are "very familiar" with this form of annuity payout. One-in-four owners said that they are not too familiar with life annuities (25 percent), while one-in-five stated that they were not at all familiar (19 percent) with them. These data suggest, once again, that producers haven't stayed sufficiently in touch with their clients and/or haven't adequately communicated the features and benefits of the products they sold to those clients.

    10. Distribution boom: Annuity owners who were under the age of 72 were more likely than older owners to say that they plan on taking money out of their annuity either through a series of payments over a specified number of years (33 percent for those younger than age 72 versus 18 percent for ages 72 and older), or through a series of payments guaranteed to last at least their lifetime (22 percent versus 10 percent), confirming the view that boomers have a greater need for retirement income than seniors.

    11. The tax game: The tax benefits of annuity ownership played a key role in the purchaser's buying decision. Seventy-seven percent of annuity owners reported that they had set aside more money for retirement than they would have if the tax advantages of annuities were not available. More than nine in 10 (91 percent) agreed that keeping the tax advantage of annuities is a good way of encouraging long-term savings. Those with annuities worth $100,000 or more were more likely to agree with that statement than those with smaller annuity values (92 percent versus 82 percent). The obvious point is producers should emphasize annuity tax advantages.

    12. Safety first: The most frequently mentioned of the non-tax reasons for purchasing annuities included: annuities are safe purchases (88 percent), they have a good rate of return (87 percent) and owners want a long-term savings plan (82 percent). Nine in 10 owners (90 percent) agreed "completely" or "somewhat" that "annuities are an effective way to save for retirement." Almost as many agreed that annuities are a good way to ensure their surviving spouse has a continuing income (88 percent), annuities are secure and safe (86 percent) and annuities are a good source of emergency funds in old age (86 percent). Eight in 10 owners believed that annuities are an effective way of assuring that money is available to pay for a catastrophic illness or nursing home care (81 percent), offer a good return (80 percent), will prevent them from being a financial burden on their children in their later years (79 percent), and are an important source of retirement security (79 percent). Owners of fixed annuity contracts are more likely to agree that annuities are secure and safe than variable annuity owners (91 percent versus 81 percent of variable annuity owners). I would expect current numbers (after the recent market meltdown) more accurately to reflect the relative safety of fixed annuities as compared with the risk and volatility of variable annuities. As always, safer money solutions resonate with clients.

    13. Socking it away: Almost nine in 10 annuity owners (87 percent) believed that people in the United States do not save enough money for retirement. This represents an increase of six percentage points from the 2001 survey.

    14. Variety rules: Annuity owners are likely to own a variety of financial products in addition to their annuities. The majority reported owning individual retirement accounts (72 percent), mutual funds (66 percent), cash-value life insurance (57 percent) and individual stocks or bonds (56 percent). Half owned certificates of deposit (49 percent). Furthermore, owners of variable annuities were more likely than owners of fixed annuities to own individual retirement accounts (76 percent versus 68 percent), mutual funds (78 percent versus 55 percent) and individual stocks or bonds (62 percent versus 51 percent). However, owners of fixed annuities were more likely to own certificates of deposit (53 percent versus 43 percent).

    15. Healthy/wealthy: Annuity owners were concerned with the risks that health and long term care costs pose to their retirement security. Almost three in 10 owners (28 percent) believed that they (or their spouse) were at a high risk of needing to be confined to a nursing home in old age, an increase of four percentage points since the 2001 survey. Similarly, more than one-third of owners (37 percent) believed that they or their spouse were at high risk of suffering a catastrophic medical condition in old age, an increase of seven percentage points since the 2001 survey. In addition, nearly half (49 percent) expressed concern that a catastrophic illness or the need for nursing home care will bankrupt them in retirement.

    16. Running on empty: More than four in 10 annuity owners (43 percent) were concerned about running out of money during retirement. Also, almost four in 10 owners (38 percent) were concerned that a surviving spouse would not have enough to make ends meet. Generally, retired owners are less likely than non-retired owners to be concerned about running out of money in retirement (36 percent versus 56 percent).

    17. Pension tension: Owners who were younger than age 64 were more concerned than older owners that money from pensions and retirement plans will not be enough to meet their financial needs in retirement (45 percent versus 35 percent), which again emphasizes the need for first-rate retirement and income planning.

    18. Security system: Retirees generally viewed Social Security and money their employers put into a retirement plan for them as their major sources of income in retirement. In contrast, those who are not retired generally viewed themselves as more responsible for their own retirement security, and believed that savings they had accumulated on their own would be more important to their retirement preparedness. Accordingly, they were less optimistic than retirees that Social Security and money their employers put into a retirement plan on their behalf would constitute a major source of their retirement income.

    19. The living standard: Today, a 65 year old has a 25-percent chance of living to age 92. Among annuity owners who said that they did not expect to live past the age of 91, a majority said that they would need to cut back on their standard of living if they were to live beyond that age. This included 24 percent who said they would need to cut back a lot and 42 percent who said they would need to cut back a little. For many of these clients, exploring ways to guarantee income in retirement in an inflation-protected way should be very effective.

    20. Optimism optimized: Annuity owners were about twice as likely (51 percent to 27 percent) to overestimate their life expectancy when compared to life expectancy figures from actuarially determined mortality tables, and 30 percent did so by at least five years. Accordingly, an education and marketing program geared toward this general misunderstanding ought to be explored.
This extensive Gallup study shows how important annuities are for providing income and a financial cushion. Annuity products also guarantee a modicum of independence for retirees, who would otherwise have to rely on their children. These important benefits must be considered by purchasers of all financial vehicles, especially those who have been exposed to misinformed and often biased claims made against annuities by representatives of investment and accumulation products.

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