Next year, the oldest of about 77 million baby boomers in the United States – the generation born between 1946 and 1964 – will turn 62 and become eligible to collect Social Security benefits.
It’s a shift that insurance and financial service companies have anticipated by customizing products specifically for boomers’ retirement needs.
One type of product drawing a particular amount of attention is the lifetime income annuity, which guarantees payments at regular intervals as long as a person lives no matter how the financial markets perform.
From 2003 to 2006, New York Life, which has offices in Providence, experienced an average annual growth rate of about 76 percent in sales of its annuity products, said Michael Gallo, senior vice president of retirement income for the company.
Driving the increase is the insurance company’s view of annuities as a growth market as baby boomers hit retirement age, Gallo said, but also the development of special features for annuity products in response to market research conducted in 2002 and 2003.
The market research was meant to determine reasons more people weren’t purchasing annuities and found concerns about liquidity as one barrier. So the company built in liquidity features, “so that if you have an emergency or life event, you can take cash out,” Gallo said.
There were also concerns about legacy, he said. Generally with lifetime income annuities, people invest a large lump sum that will be returned to them monthly or quarterly so that they can maintain their quality of life post-retirement.
Some people worry that if they die before the funds run out, there would be no way to ensure the balance would go to their surviving loved ones, so New York Life also “built in features … where you could attach a death benefit,” Gallo said.
Those features include an option where all of the principal would go to an heir or 25 percent to 50 percent of the principal would go to an heir. The retiree could also chose a 10-year certain or 20-year certain option where a benefactor would continue to get payments for 10 or 20 years after the retiree died.
Financial services companies such as Fidelity Investments also see annuities as a significant growth market, said Ken Hevert, vice president of annuity management at Fidelity, which has a regional campus in Smithfield.
“This has been a growth business for us for several years,” he said. “But one of the things we’re seeing now that we didn’t see years ago is insurance companies positioning themselves as retirement insurance companies.”
Insurance companies can put annuities into a risk pool, Gallo said, as they do with life insurance.
“The benefit of risk pooling is we can provide 25 to 40 percent more income than people can safely pay themselves through alternative means,” he said. “We’re not saying, ‘Put all of your money in annuities.’ … You have your basic needs such as rent and bills, so you should at least have guaranteed life income up to that amount.”
Carl Heintzelman, president of Insurance Brokerage Services Inc. in Warwick, said he’s seeing more and more companies offer incentives for annuities such as a 7-percent bonus, so if a consumer invested $100,000 into an annuity, the company would add another $7,000.
“All of these companies have little scenarios,” said Heintzelman, who handles products from about 20 carriers. “They might give a bonus, but you can’t use it until you annuitize it. You have to look at that. You have to read the fine print.”
Another benefit of annuities is that they can reduce the risk of outliving your assets, Hevert said, and as people are living longer, that is becoming more important.
With that in mind, New York Life offers features, such as a 1- to 3-percent adjustment for inflation, Gallo said, meaning a payout would increase by 1 percent to 3 percent each year.
People could also opt for a “changing needs option,” which allows them to pick a time down the road – when they are 85 years old, for example, and might have increased medical expenses – to increase the payout, he said. Some people prefer the reverse. They want to have a greater payout when they are younger so that they can enjoy their lives while they are younger.
Fidelity Investments also tailors annuities to the consumer, Hevert said, and strives to make the plans affordable.
“One of the reasons annuities took longer to take hold was because they are considered to be complex and expensive,” he said. “Our approach is to really look at it and say, ‘They don’t have to be.’ We will make them affordable and effective by redesigning the product and delivering only the features that add value from a financial and emotional standpoint.” •
