Here is an interesting recent post by Stan Haithcock, at www.marketwatch.com. An interesting analysis of potential changes to annuities as a result of the July 1, 2014 IRS ruling:
Hate annuities? 7 reasons you might change your mind.
Even though there are over $200 billion of annuities sold annually in the U.S., the industry finds itself at the crossroads of consumer legitimacy. A demographic tidal wave of retiring baby boomers, money in motion, and a yearning for guarantees will change the annuity industry forever, whether they like it or not.
1. Commissions will be lower
Wells Fargo announced last week that they are calling for commissions on fixed-index annuities to be lower across the board. This is just the start of the common sense compensation changes that need to happen. Here's an idea, how about paying the agent less and building more value into the product.
Another big issue will be the elimination on soft dollar arrangements between carriers, distributors, and agents. This under the table nightmare would make D.C. politicians green with envy if they new the details, and needs to end immediately.
2. Simplicity will overcome complexity
In the current annuity sales environment, the vast majority of annuity sales represent only two of the 15 types available. The most complex annuity strategies (variable and indexed) also pay the highest commission to the agent. With the recent QLAC ruling on July 1, the march of consumer demand to product simplicity has already begun.
Low commission, easy to understand, and no annual fee products like longevity annuities, fixed-rate annuities, and single-premium immediate annuities will eventually represent the majority of sales. Complex annuity strategies will always be sold, but they will represent the minority of sales in the future.
3. Annuity agents will go the way of travel agents
There are still some travel agents around, but most people now buy direct from airlines and hotels or with online sites like Orbitz, Kayak, or Priceline. Can you even imagine going to a local travel agent to book a trip? The same direct-to-consumer sale will happen in the annuity industry, especially as the consumer starts demanding simpler products.
The dirty little industry secret is that most carriers would love to get rid of agents altogether, and are just waiting for the right time to dispose of these walking compliance nightmares. Yes, I am an independent agent, and am predicting my own eventual career reality, but this direct sales model will definitely happen. I just hope to be a part of helping these direct-to-consumer companies do it right so that people can make informed buying decisions.
4. Federal oversight will eventually happen
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Annuities are regulated at the state level, with variable annuities also falling under SEC jurisdiction because VAs are considered a security. What's going to drive the federal government to eventually step in will be the continuing unregulated sales message of indexed annuities. With annuity promoters now aggressively showing up on national cable TV and the Internet with ads that make the securities lawyers and common sense observers cringe, it's only a matter of time.
5. Annuity guarantees without having to buy an annuity
People love their Social Security payments and pension income from their employer, but hate the thought of owning an actual annuity. Hypocritical yes, but also understandable in the current climate of high pressure annuity sales. Contingent deferred annuities, or what I have renamed Portfolio Income Guarantees (acronym P.I.G.) will become very popular because most people want annuity guarantees without having to buy an annuity. That's a fact, and the reason you will see more of these income guaranteed products attached to stock, bond, and exchange-traded fund type portfolios.
6. Annuities will become as commonly owned as mutual funds
When companies began offering defined contribution plans (401(k)s) instead of defined benefit plans (pensions), mutual funds were destined to be one of the most popular consumer products in financial history. Today, most employed people own mutual funds through their employer plan. The same thing will happen with annuities after the July 1 ruling that allows Qualified Longevity Annuity Contracts (QLACs) to be used in 401(k)s and personal IRAs.
7. Longevity annuities will be the No. 1 selling annuity in five years
As mentioned in the previous paragraph, the QLAC ruling is a total game-changer in the annuity world. Even though all longevity annuities aren't QLACs, this new law will introduce the public to an efficient strategy for lifetime income that starts at a predetermined future date.
Longevity annuities are also called deferred income annuities or DIAs. They have no annual fees, and can be structured in numerous customized ways for contractual solutions like joint life income, guaranteed death benefits, and annual cost of living increases (aka: COLAs). The primary downside to a longevity annuity is a lack of an accumulation component before income is turned on. However, this will only force people to fully understand the product and properly allocate the strategy within their portfolio. Longevity annuities solve for lifetime income, and this transfer of risk benefit is the primary reason that annuities were developed and why they should be owned.
Longevity annuities can be used outside of a qualified account, and people that use them in their 401(k)s and IRAs will be more likely to add that same simplistic strategy in non qualified accounts for other income needs.
Back to the annuity future
These predictions aren't earth shattering, and are based on my decades of experience in the financial trenches and basic common sense. Annuities are going to go back to the simplistic transfer of risk design as originally intended, and that is a good thing.
As a popular ad campaign we all remember once said, "Got milk?" My last prediction is that sometime in the near future, the annuity industry will have a similar ad that will just say "Got guarantees?"
The correct annuity message is really that simple.