Date: 8/19/2014
Source: Incapital
Author: Incapital

Annuities for a New Generation of Investors
Incapital's Ken DiFrancesca on why innovative annuity products strike a chord with advisors and investors

Given prevailing interest rates and current investment alternatives, annuities have regained attention as a retirement planning tool.  The successful introduction of several new products in recent years has helped boost the reputation of annuities with advisors and investors. 

Two historical examples of how the annuity industry stepped up with new products to meet specific investor needs were the introduction of modified guaranteed annuities in the 1980s and fixed indexed annuities in the mid-1990s.

More recently, a new breed of fixed annuities make these products easier to understand, making them a good “toe-in-the-water” investment. Increasingly, fixed income annuities have proven to be a successful way for investors to grow their investments tax-free, while providing the peace of mind that investors can activate a stream of income that is guaranteed to last a lifetime. 

The growth-oriented variable annuity is once again gaining more traction in the marketplace.  For investors willing to accept the associated market risks, the product is designed to help grow and/or protect one’s asset base, knowing it can be converted to a guaranteed income stream at a later date. Investors should of course remember that any guarantees associated with annuities are subject to the claims-paying ability of the insurance company.

The recent increased focus around simpler and more transparent fixed annuities offers a few lessons that we as an industry can apply to the design of other annuity products, including variable annuities. We are starting to see significant changes in the variable annuities that are now being offered to investors. In 2002, 70 percent of the variable annuities sold had a surrender period of longer than 10 years. Today, leading annuity providers have helped to significantly reduce the range of fees on these products. 

Investors and their advisors should be careful that we are addressing one need at a time. This means returning to variable annuities’ roots as vehicles for income, not accumulation. Investors constantly remind us that this is why they are interested in annuities in the first place.

Looking Forward: Incapital's Role in the Design and Distribution of Annuities

When designing products for the next generation of annuity investors, the possibility of higher interest rates and a return of inflation must be considered. 

Incapital was founded 15 years ago with a mission to help level the playing field for individual investors. As we work to build Incapital’s annuities business, we’re following that same philosophy. That means we are focused on products that investors can understand and evaluate.

We can also strive to make things clear for investors in the way we present annuities. The Insured Retirement Institute has asked the Securities and Exchange Commission to accelerate a change in rules that would provide investors with a plain-English summary of the costs and benefits of variable annuities. Currently, the main written guide for most investors is a prospectus that can run a couple of hundred pages. A more readable and condensed prospectus is long overdue.

We’ve seen progress in fees and surrender periods, but more can be done. Our focus should be on empowering people to make smart choices and making sure they are secure about their decisions. 

We can’t be everything to everyone, but we can continue working to develop simpler products that provide income to give investors the peace of mind they need in an uncertain world.

There’s a place in many investors’ portfolios for annuities and it’s our responsibility to make sure we help investors achieve their desire for income and security. 

Ken DiFrancesca is Managing Director, Annuities, for Incapital, a Chicago- and Boca Raton-based distributor of annuities, unit trusts, fixed income and Market-Linked Products. He has been a leader in annuity sales and distribution for Security Benefit, Fort Dearborn Life, MetLife Investors/COVA Financial, and GNA Corporation.