Annuities Analysis, Pt. 1

Part
01
of four
Part
01

Annuities: Financial Wellness

Annuities come in many styles and are contracts between an annuity holder and the insurance company. Contracts carry different provisions, costs, payouts, and tax rules. While annuities can be personalized to fit a consumer's needs, it is important to remember there are vast arrays of possibilities that can seem overwhelming to potential annuitants. There is a wide menu of annuity contracts and products that can seem daunting to consumer's who are considering them. Particular annuities may have a mixture of provisions, signifying they fit into different types and classifications. Every provision comes with different costs and benefits. Below are some key details of how annuities may impact a consumer's financial wellness.

What Are The Different Types of Annuities?

  • Fixed annuities can guarantee that consumer's earn interest and offers a guaranteed payout. The payout amount remains constant for the term of the annuity contract.
  • Variable annuities allows consumers their choice of risk levels along with different investment options. Some consumers may receive a sizable payout or risk losing their money completely. This depends on the options they choose from. Payouts are based on the investment’s performance.
  • Indexed annuities earn a return attached to a certain market index (commonly the S&P 500). Should a consumer's annuity perform well, a consumer's monthly payout during retirement may be higher. Annuity payouts are based on the performance of a specified equity-based index.
  • Immediate annuities will begin payouts within a year after purchase.
  • Deferred annuities will begin payouts at a later point as agreed to within the consumer's contract.
  • Immediate and deferred annuities are both tax-deferred, and consumer's will not have to pay the IRS until they receive their payout.

The Pros of Annuities Impact Financial Wellness

  • Annuities do not affect your credit score, but they can impact a lender's decision of your credit worthiness when applying for a loan. Annuities do not have to be listed as assets for future loans. For example, mortgage lenders look both at a consumer's credit score and debt-to-income ratio.
  • Annuities do qualify as income towards debt-to-income ratio if payments are scheduled for at minimum the next 36 months.
  • A life annuity is an income stream for life, even if the initial principal and earnings are exhausted. Consumer's can also purchase "joint annuities" with their spouse. However, the longer the person is expected to live, the lower the individual payments are likely to be.
  • Consumer's who have culminated contributions to their 401(k) or IRA, an annuity is another option to use as retirement income.
  • With no annual contribution limits, this sets annuities apart from a 401(k) or an IRA.
  • While annuities provide a guaranteed return they don’t offer growth potential that other investments may, such as investing in stocks.

The Cons of Annuities Impact Financial Wellness

  • Consumer's find that once you invest in an annuity, it can be difficult to get it back because of the terms set up in their payout.
  • If a consumer is in a financial emergency, like unexpected medical costs or job loss, they may not be able to gain access to their money, or it might be too costly to do so.
  • Annuities may have exceedingly high fees, up to 3% or more per year.
  • According to Credit Karma, Vanguard does not charge annual service fees for traditional IRA's if consumer's have at least $10,000 in their account compared to $20 to an account that has less than $10,000.
  • Annuity contracts may also charge fees for withdrawing your money early and adding on additional policies, or administrative fees.
  • Withdrawing money from an annuity will cause severe tax penalties, which includes an inversion of the exclusion ratio process. The IRS considers this withdrawal as earnings in a "last-in/first-out" formula,
  • Consumer's pay full taxes on money withdrawn until the annuity is left with the initial investment. The initial investment can be withdrawn tax-free.
  • If a consumer doesn't fully understand every detail of their annuity, it’s possible that it can hurt a consumer's financial situation more than helping.
  • Consumer's annuities are only as good as the insurance company's financial health. They are placing a bet that the firm won’t go under and will remain in excellent financial health. Financial institutions like Bear Sterns and Lehman Brothers show even the most successful institutions can capitulate.
  • Annuities aren’t insured by the FDIC or NCUA, but are covered up to a certain amount as laid out by individual states.

Research Strategy

To find the information above, our research team used data from fact based research sites and articles from reputable online business, banking and financial journals, reports and studies.
Part
02
of four
Part
02

Annuities: Notable Events

The annuities industry has experienced both positive and negative activities in the past 12 months. A complete dive into the various notable events is presented below.

Blueprint Income and Pacific Life Launch a New Digital Experience For The Annuity Market

  • Technology is one of the current drivers in the annuities industry.
  • Blueprint Income and Pacific Life Launch are collaborating to modernize the process of buying annuities. This will attract technology-savvy consumers.
  • Blueprint Income is an annuity aggregator that deals with simple annuities to provide a customer-centric experience.
  • Their product is called Next Deferred Income Annuity. It has a set monthly income based on a predetermined date of retirement.
  • Next Deferred Income Annuity uses a simple setup process and is affordable at a minimum of $100. Approval is almost instant and requires no paperwork or telephone calls for feedback.

Kindur's Founder Discusses the Unique Aspects of the Company

  • Kindur is a digital financial adviser for individuals who are about to retire. This annuity aggregate has less than 20 employees but has generated $10 million from investors.
  • The retirement tech company was established to help retirees understand how much money they can comfortably spend.
  • The aim of the company was to create a holistic process of decision-making about insurance matters so that users do not make mistakes and also feel comfortable in the process.
  • The founder, Rhian Horgan, stated that Kindur does not charge commissions but instead charges a 0.5% fee for assets under its management.
  • Kindur's organizational culture promotes diversity to tap into the potential and creativity offered by individuals from different cultures, work skills, ages, and technological capabilities.


Kindur's New App Helps the Aged to Outlive Their Money

  • Kindur focuses on Baby Boomers rather than on the elderly because Boomers still have purchasing power.
  • The company's goal is to help individuals to retire without worrying that their money will run out early and that they will grow old while broke.
  • The Kindur app is easy to set up because the account is free and the process of registration only requires a few simple answers. Once set up, the client gets a provisional free plan that advises on spending and other financial factors.
  • Potential clients can create scenarios and request for advice or feedback through various communication channels.
  • The Kindur app already has over 1,000 potential clients.
  • The app has significant potential to increase the company's competitive edge and to acquire a digitally savvy consumer base that will grow Kindur's market share in the long term.


Covr Financial Technologies Increases its Capital

  • Covr Financial Technologies is a digital insurance platform that is classified as an annuity aggregator.
  • It offers insurance services to families in partnership with financial institutions that share its goals of simple but effective service provision.
  • The company raised $500,000 as a grant from VentureClash in order to enhance its operations.
  • This fund-raiser adds to the company's continued collaboration with financial institution partners, who all benefit from Covr's technology-based expertise.
  • Conversely, Covr benefits from the partners' economies of scale and industry expertise. This creates a symbiotic relationship that can be used to grow both companies in the long term.

Covr Partners With RetireOne

  • Covr's partnership with RetireOne is aimed at enhancing its offering in the annuities market while leveraging the financial resources of the latter.
  • RetireOne has a large portfolio of clients that both companies can leverage to ensure that their product and service offerings are of excellent quality.
  • The two companies have created content, produced educational webinars and offered support to their clients to increase client awareness on the benefits of the partners' offerings.
  • The new products they offer will improve the operations of their clients, who are mainly registered investment advisers.
  • In turn, the advisers will effectively offer high quality services to their respective clients, thus building consumer trust and value.
  • This support is critical because it will help the advisers to learn better strategies for business management so that they can incorporate insurance into their clients' plans.


Research Strategy

We searched through annuity aggregators and other industry papers to find recent notable events. After finding suitable aggregators, we went on to select notable events that were relevant based on the given timeline. We selected the notable events based on availability of such events in the recent past.

Part
03
of four
Part
03

Annuities Aggregators: Demographics

The most likely US consumers to use annuity aggregators are Americans who purchase annuities. These individuals are generally married, educated females who are 50 years or older.

Age

  • According to the latest Gallup survey of US annuity owners, the large majority (86%) purchase their first annuity before the age of 65, while approximately half (47%) purchase their first annuity between the ages of 50 and 64 years old.
  • Additionally, Gallup highlights that the average age of first-time US annuity buyers is 51, the median age of first-time buyers is 52 and the average age of all US individual annuity owners is 70.
  • Notably, 2019 reporting by InvestmentNews generally corroborates this finding, by reporting that the average age of US buyers of fixed income annuities is 63 years, and that approximately two-thirds of sales for these products are to buyers between 56 and 70 years of age.
  • Similarly, a 2016 analysis of the US individual annuity market by LIMRA reported that US annuity buyers have an average age of early 60s.
  • Additionally, the LIMRA analysis suggested that the average age of US annuity owners varies by product, with typical US buyers for bare variable annuities, deferred income annuities, indexed annuities without guarantees, indexed/variable annuities with benefits guarantees, fixed rate annuities and SPIAs having average ages of 57, 59, 61, 62, 65 and 71, respectively.

Gender

  • Notably, the most recent data from Gallup indicates that annuity buyers in America are fairly evenly split between women (51%) and men (49%).
  • This distribution by gender represents a shift, given that women have significantly outnumbered men as purchasers of annuities in every Gallup survey apart from 2001.
  • Meanwhile, MThe Wall Street Journal and Kiplinger are among the industry experts that explain the preponderance of female annuity buyers based on the fact that US women will receive an average of 42 more monthly payments from a lifetime annuity.

Household Income

  • Gallup highlights the fact that the average household income of annuity buyers has "slightly increased" over the last two decades to a median income of $64,000.
  • In particular, the large majority (80%) of US annuity owners have annual household incomes of less than $100,000, while most (60%) have incomes below $75,000.

Employment Status

  • While Gallup reports that most individual annuity owners in the US are retired (65%), the number of employed annuity owners has increased steadily over the last decade to 28%.
  • Additionally, American annuity buyers come from a variety of professional backgrounds, including former/present occupations as support staff (12%), service workers (14%), managers (15%), business leaders (15%), and professional roles as doctors, lawyers and teachers (34%).

Education

  • Overall, American annuity buyers are highly educated, with 72% having at least some college education.
  • Additionally, over half (53%) have a college degree, while over one-fourth (26%) have some form of post-graduate education.
  • Meanwhile, 21% have received only a high school degree and 4% have received some form of vocational training.

Marital Status

  • Finally, most US annuity owners are either married (58%) or widowed (24%).
  • Only 10% have never been married, why an additional 7% are currently divorced.

Research Strategy

An extensive review of credible media sources, industry reports and articles by experts in the annuities and annuity aggregator industry was unsuccessful in providing a demographic profile of US consumers that use annuities aggregators. This is likely because available information about the US annuity aggregator industry overall remains somewhat limited. Several additional strategies were attempted to triangulate this data, including a search for the customer demographic information of key players in the annuity aggregator industry, including customer insights from annuities.com, annuity.org and immediate annuities.com. Unfortunately, this review for customer demographic information from industry providers failed to produce meaningful results.

However, this research approach suggested that the most likely US consumers to use annuity aggregators are those Americans who purchase annuities in the country. Notably, a review of media sources and industry reports revealed that the most credible and highly cited source of information about US annuity customers is the Gallup Survey of Owners of Individual Annuity Contracts. This survey is completed approximately every five years, and the latest available version is from 2013. While a scan was conducted for more current data about US annuity buyers, this search found that the latest available articles by industry trades (e.g., Annuity.org, AnnuityFYI, The Committee of Annuity Insurers, SafeAnnuityEducation, SafeMoney) continue to cite the 2013 Gallup Survey as the most credible and recent information. As such, the latest available data from Gallup was provided within the above summary, alongside other relevant data points as they were available.
Part
04
of four
Part
04

Annuities: Industry Overview

The US annuity industry began experiencing meaningful growth following the Great Depression that ravaged America. Before that, annuities only accounted 1.5% of all the total life insurance premium collections. The size of the US life insurance and annuity by 2020 is estimated to be $868.5 billion and is expected to grow owing to an increase in the number of the aging population and the increase in disposable income levels

Historical Background of the US Annuities Industry

  • Annuities in any form or nature have existed in world for at least 2000 years, having first been traced in the Roman Empire where speculators dealt financial instruments known as annuals.
  • In the Middle Ages, there is historical evidence of an interesting form of annuity named tonetine that was part lottery and part annuity, as investors who bought the shares did not only benefit from a life annuity. When participants passed away, the survivors would win a huge sum of payment and this would continue with other survivors until the principal amount is fully exhausted.
  • By the 18th century, nations in Europe were issuing annuities to citizens that would guarantee the investors a lifetime income for the respective state. These annuities were mainly issued to raise money to either finance wars, fund politics and loyalist as well pay stipend to the ruling class and royals.
  • In the United States, the annuity market was almost non-existent prior to the Great Depression. Estimates show that between mid-1860s and 1920s, annuities only accounted for 1.5% of the entire life insurance premium receipts.
  • The Great Depression created a lot of uncertainty especially in the private sector making it an attractive and safe form of investment.

Overview of the US Annuity Industry

  • The size of the US life insurance and annuity is estimated to reach $868.5 billion by the end of 2020.
  • Between 2015 and 2020, the life insurance and annuity industry has recorded an average decline of 2.3% annually.
  • In terms of market size, the Life Insurance and Annuity industry in the United States was estimated to be the second largest segment of the finance and insurance industry and the 8th largest market in the entire country.
  • In general, the life insurance and annuity market in the US is expected to grow in the next 5 years owing to a number of factors such as the growth of in aging population and rising disposable income levels.

Role of the Annuity Aggregators

  • Annuity aggregators are generally considered "comparison shopping sites" and their product offerings are largely centered around enabling the customers "compare product features, carriers, coverage and price." Aggregate websites empower the customers by giving them a sense of "greater control" in choosing and managing annuities.
  • As distribution disruptors, annuity aggregators have become increasingly potent and useful to the different stakeholders in the insurance industry. For instance, insurance aggregators benefit from reduced number of contracts while, at the same time, increasing the distribution points.
  • Annuity aggregators occupy a previously unoccupied niche, that of an online presence especially among life insurance products. This is partly due to the fact that online adoption by insurance companies has been quite slow.
  • In 2010, findings from Comscore indicated that 78% of the total annual online insurance sales came from insurance aggregators websites. Customer Respect Group, indicated in 2011 that 90% of all life insurance quotes originated from aggregator sites.
  • Aggregator websites further place immense pressure on the agencies to be more profitable and equally competitive, factors that can either reduce margins or proliferate the brand name.



Sources
Sources

From Part 01
Quotes
  • "An annuity is an investment product issued by an insurance company designed to grow in value and then pay out a stream of guaranteed monthly payments starting at a later, set date – usually corresponding to your retirement."
Quotes
  • "There are some ultra-conservative investors out there who look for the safest, most secure investment possible. When interest rates are low and stock performance is volatile, some investors will look for the opportunity to get the best bang for their buck. "
Quotes
  • "An annuity is a retirement financial tool. Unlike many retirement tools, though, annuities are contracts between you and an insurance company, rather than with banks or investment companies."
Quotes
  • "A debt-to-income ratio examines the relationship between how much money you currently owe to other lenders and the amount of money you’re currently bringing in."
Quotes
  • "The annuity exclusion ratio tells you how much of your annuity returns you’ll have to pay taxes on."
  • "The exclusion ratio is the portion of an investment’s return that is not taxed. It’s a percentage of the total investment payout equal to the amount of money you originally invested. This initial principal comes back to you tax-free, after which you pay taxes on the remainder, which make up the profits earned from your investment. Exclusion ratios show up mainly in annuities, although not entirely."
Quotes
  • "The guaranteed income stream provided by many annuities gives retirees peace of mind by ensuring their needs will be provided for as they traverse their golden years. Employer-provided pensions are quickly becoming extinct, leaving retirees to live on Social Security and their savings."