This Month:
Double-digit growth for VA sales in Q2
Taking stock in new annuity realities
The annuity market circa 2010
First quarter fixed annuity sales decline
Signs of a new market paradigm for 'risk-proofed' VA products
Longevity Annuities: Microsoft at 80 cents a share?
Variable Annuities inch upward
Going Long: How longevity impacts the annuity market
In search of safety
Variable Annuities: Still ideal for Boomer retirement
Fixed annuities sale rise in Q2
Annuities and the search for a 'new normal'
151A-The battle continues
Beware tax trap on Non-Qualified 1035 Exchange
Will 151A spell doom for Annuity Insurance Agents?
Retirement Income Laddering
Give retirees a raise
Post retirement allocation : Three buckets are better than one
Retirement: what's the hold up? 54 percent will delay retirement; 40-somethings most impacted by economic crisis
Retirement Income: All About Accumulation

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Double-digit growth for VA sales in Q2

Variable annuity (VA) sales increased 11 percent in the second quarter of 2010, as compared to the prior year, to reach $35.5 billion, according to LIMRA's U.S. Individual Annuities Second Quarter 2010 Sales Report, which represents 96 percent of the market.

VA sales were 10 percent higher than sales in the first three months of 2010. For the first six months of 2010, VA sales improved eight percent compared to the first half of 2009, totaling $67.9 billion.

"After five consecutive quarters where VA sales were lingering in the $31 to 33 billion range, we are finally seeing signs of recovery as VA sales jumped more than $3 billion in the second quarter," said Joe Montminy, assistant vice president for LIMRA's annuity research. "In addition, there was broad market growth as most companies in the top 20 experienced VA sales growth this quarter, whereas last year we saw growth concentrated with the top five carriers."

Fixed annuity sales continued to decline in the second quarter, down 26 percent compared to the second quarter of 2009, when total fixed annuity sales were much stronger. However, compared to the first quarter, fixed annuity sales improved 13 percent to $21.5 billion in the second quarter of 2010 and $40.5 billion year-to-date.

After a slight drop in the first quarter of 2010, second quarter indexed annuity sales matched the record levels hit in the second quarter of 2009. Market volatility and the low interest rate environment continued to drive sales of indexed annuities, which reached $8.2 billion in the second quarter.

Book value annuity sales dropped 43 percent in the second quarter of 2010, totaling $8.1 billion but improved seven percent from the first quarter. Second quarter MVA sales of $1.6 billion were down 54 percent from second quarter 2009. Fixed immediate annuity sales were $2.1 billion and structured settlement sales reached $1.5 billion in the second quarter of 2010.

Total annuity sales were down seven percent in the second quarter compared to the second quarter of 2009 to $57.0 billion. However, total annuity sales grew 11 percent over the first quarter, marking the first quarterly increase in total annuity sales since the fourth quarter of 2008. Year-to-date, total annuity sales totaled $108.4 billion.

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Taking stock in new annuity realities

by Douglas Dubitsky

Douglas Dubitsky is Vice President of Product Management, Retirement Solutions, for the Guardian Life Insurance Company of America. He can be reached at douglas_dubitsky@glic.com.

The meltdown of the world's financial markets in 2008 triggered a surge pushing annuity sales to record levels and helping them remain strong during 2009 and 2010 for companies who stayed the course in this product line. Now that we have more perspective on just what motivated our clients during the panic of 2008, it's important for advisors and producers alike to take stock of some new realities. Three stand out:

High Stakes

Don't lose sight of just what's at stake: $22 trillion. That's the amount of wealth that LIMRA, an organization that tracks the life insurance industry, says is controlled by fully- and partially-retired households in the U.S. The implications for your business are staggering: LIMRA currently reports that two-thirds of the 18 million households with over $50,000 in annual income that are either in retirement or that will soon leave work will seek the help of a financial advisor in making key decisions about the money that will carry them through life.

An Anxious New World

In order to gain a better understanding of the new annuity marketplace, let's first recap just what 2008 did to the investment attitudes, outlooks and expectations of your clients.

Our society lives in a world where the Internet and cable television have put a conduit of financial information at our fingertips, 24 hours a day. Clients now must navigate a torrent of news on the economy, the stock market and their retirement accounts. The market crash of 2008 didn't help matters. Nearly every investor was negatively affected by the turmoil. As a result, Americans are more nervous as they prepare for and enter retirement in the current environment. Clients are more risk averse and highly skeptical. They're seeking help, not only a clear path to follow, but also the product and plan transparency that will help them track the steps they take to realizing their goals.

Remember, too, that retirement has changed considerably over the last 30 years. As recently as the 1980s, you could expect to leave work sometime between the ages of 62 and 65 and rely on a pension, Social Security and perhaps some savings to pave the way for the final 20 years of your life. Fast forward to 2010. The burden of retirement planning and saving has been passed on from companies to clients. Longevity has created new challenges. Americans must save for retirement and a longer life in retirement as well. Not only must individuals accumulate funds for their golden years, but they must also set goals for a lifestyle and a spending down of retirement assets to last during the remainder of their lives.

As a result, in just the last two years, we've seen a lot of conventional wisdoms return to fashion. Clients are once again concerned about risk management and guaranteed returns, the very features that are the bedrock of the annuity industry. It's no surprise, that in the current climate, LIMRA reports that there is a shift in thinking currently underway. The market is currently moving from traditional asset allocation models toward product anchored strategies with annuities playing a central role.

Brave New Market

It helps that the annuity market has expanded to meet the needs of a new generation. As recently as 10 to 15 years ago many producers seemed fixated on a single solution suitable to as large a client base as possible.

That's no longer the case. Fresh thinking has led the industry to realize the importance of providing a variety of guarantees applicable to a wide array of circumstances that touch our clients' lives. There are suites of annuity solutions now available offering clients a number of angles to meet their own individual needs. Equity based products help clients in their accumulation years and can offer customers a wide array of choices. Fixed annuities set out firm rates of return that clients can bank on. Single premium immediate annuities make it possible for customers to convert a portion of retirement assets into a steady stream of income to last their lifetime or a specific period of time, in a form of periodic checks.

Advisors, Producers take Center Stage - Together

It's also clear that your client base is leaning on you more than ever before. The investing public is looking to you for an understanding of the financial markets. They seek your knowledge of complex annuity products, contribution limits and investment choices. They want your guidance on how to set and attain lifestyle goals, how to build wealth, protect it and finally establish legacies. In some instances, partnering with a CPA/accountant or estate planner is the right direction to go in to address clients' holistic needs.

Remember that every annuity contract is a long-term commitment you're making with valued clients. Its underlying obligation can stretch over two or more decades or a lifetime. Think of it: you're selling a document that binds their future to your reputation and ultimately to the issuing financial institution as well.

That's where another important lesson from 2008 comes into play. The turmoil we witnessed shook the financial services industry to its very core. A number of publicly traded insurers came under pressure when their stock price plummeted. Many insurers sought and received government aid in order to weather the storm, and many changed their annuity strategy all together.

Now, more than ever, the financial security and experience of an annuity issuer have become critical factors. It's always been essential to check the financial solvency of an insurer by combing through ratings reports compiled by the big four agencies: A.M. Best, Fitch, Moody's and Standard & Poor's. Check for companies that have been in business for 50, 100 or more years as an indicator of sound stewardship during strong and weak economies alike.

Don't overlook product selection and back-office support. The best issuers should offer a holistic selection of annuities and riders that provide clients the most flexibility possible, from fixed, to immediate to variable products with a full range of payout options. A provider with a customer service desk that's available to help you and your clients with answers to many of their product-related questions is a plus, one that is a reassuring comfort for you and your client.

The Bottom Line

Make no mistake. The new realities now shaping the annuity market are an exciting development for clients, advisors and producers alike. They offer us all a formidable opportunity, a chance to provide security and peace of mind to a generation of Baby Boomers, a market of millions of people who are preparing for, approaching or even now flourishing in retirement. It's more than a chance to grow your advisory business, too. Beyond the prospect of additional business, remember that you can now boost the satisfaction you reap from guiding clients to the very best choices they can make. The moral of the story? Maybe it's a variation on, "Every cloud has a silver lining,", perhaps something along the lines of, "With the right steps, there's an ingenious way to bring security to those in need in even the most worrisome times."

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The annuity market circa 2010

by Herbert K. Daroff, J.D., CFP

Herbert K. Daroff, J.D., CFP, is associated with Baystate Financial Services in Boston. He is a contributing editor for LIFE&Health Advisor. Daroff can be reached at hdaroff@baystatefinancialplanning.com.

What's happening with annuities?

Generally, variable annuity sales are down and fees for living benefits and death benefits are up. The "low-hanging fruit," the funds held by the most risk averse investors have been captured.

Interest rates are still low. However, since they are expected to begin rising (of course, we've thought so for the last three to five years), annuity sales are slower.

Stock markets are still volatile. However, since investors are coping better with the volatility and the scale of the volatility has diminished (at least right now), annuity sales are slower.

The major change in the annuity market is the significant reduction in the number of players. Fewer insurance companies are actively marketing or selling annuity products. Just as some investors remain on the sidelines, a number of annuity companies are on the sidelines right now. Just like investors, they are waiting to get back in. In 2010, three companies are capturing approximately half of all sales.

How has the continuing low interest rate environment impacted the annuity market?

I remain intrigued when I see people placing fixed deferred annuities instead of variable annuities with guaranteed minimum income benefit riders (or other riders). Why lock in a ceiling of some of the lowest interest rates in history (e.g., three to 4.5 percent), instead of having a floor of a higher interest rate (e.g., five percent)?

As stated above, too many investors still have too much in cash (on the sidelines). To them, it's not about risk tolerance, but their perceptions of stock market risk. So, they missed the large increases. Variable annuities with proper lifetime benefits hedge investment performance. It gives investors the "permission" to get back into the markets and then to "buy and hold."

What could be better than, "heads you win, tails you get five percent (higher or lower depending on product)?" I have often written about the way many investment advisors (analyticals) present the facts when it is emotions that are driving their client's behavior. The example I have used before is the plane that hits an air pocket and is losing altitude, "dropping like a stone." The passengers are screaming, "We're all going to die." An investment advisor holds up his laptop and starts presenting slide after slide showing how safe air travel is compared with others forms of transportation. Then one passengers chimes in, "Remember, past performance does not predict future results."

Annuities may be good, bad, and/or ugly, but especially for the most risk averse, those who run to the sidelines every time the markets decline, they serve as an emotional rescue for their behavior.

With interest rates this low, should someone's portfolio really be over-weight in cash and/or fixed income? I asked investors what they tend to do when the DJIA drops.

Some answer, "I buy more." So few are disciplined enough to recognize that buying low is still a good idea. As shoppers, instead of investors, they look for items on sale. Why not as investors, too?

Others answer, "I run to the sidelines." These are the best candidates for variable annuities with the proper lifetime benefit riders.

Some journalists argue that because of the low interest rates, investors should borrow against the value of other assets and invest more heavily in equity markets. They suggest that a growth portfolio shouldn't be allocated 70 to 80 percent in equities, but 120 to 130 percent in equities. I am not advocating this position. I do, however, caution those pre-retirement investors who are greater than 40 percent in fixed income, that because of today's low interest rates they are significantly hurting their retirement income potential.

What is the outlook for 2011 and beyond?

The answer is in the quantity and quality of "referrals" you get from your existing annuity clients. Most clients are very grateful to you when you review with them their annuity statements (compared to market volatility). Ask them, "who else do you know who would benefit from this?"

Also, I believe that variable annuities with the proper living benefit riders help clients invest more aggressively, especially in small cap and in international. All too often, clients invest for safety by increasing the debt or bond holdings in their portfolio. Over time, this strategy has served to lower the total value of the account and reduce retirement savings. Instead, pay a fee for safety and invest aggressively with a portion of the portfolio that should be designated for small cap and international. This amount, of course, will vary by client based on time horizon and risk tolerance.

The living benefits and death benefits on variable annuities enable clients to take equity risk with reduced equity volatility.

New products and riders are increasingly friendlier to Required Minimum Distributions (RMDs). In many products, once withdrawals begin (e.g., 70.5), the deferral bonuses stop (i.e., five percent guaranteed minimum income benefit, or GMIB, stops hedging the return). MetLife is planning to launch a new RMD Friendly Plus rider in July (when this article was submitted) that will continue to credit the difference between the RMD percentage and the five percent GMIB. So, when RMD percentages are lower than the GMIB rate (e.g., five percent), if you need to withdraw 3.6 percent for that year's RMD, the account will still grow by at least 1.4 percent. When the RMD is greater than the GMIB rate, the account will still grow by at least the RMD rate. So, if you need to withdraw six percent, the account will grow by at least six percent.

Another enhancement to lifetime income benefit riders (not necessarily available for lifetime withdrawal benefits) is what happens when the actual account value goes to zero. In most withdrawal benefits, the client may experience a reduction in income when the income reverts to the fixed percentage of the based (e.g., five percent). Some income benefits can result in an increase in income depending on the age at which the account value drops to zero (e.g., six percent at age 78, seven percent at age 82, eight percent at age 84, etc.).

What remain the biggest objections from clients?

In October 2008, I was involved in the debate that took place in Boston at the Financial Planning Association (FPA) national convention between John Huggard, a tax attorney and professor in North Carolina, who set out to write a book on why mutual funds are better than annuities, and ended up writing the opposite book, and Harold Evensky, a Certified Financial Planner Practitioner from Florida, who is a staunch advocate for mutual funds. Originally, John was to speak alone. But, a great deal of controversy arose regarding mutual funds vs. variable annuities. So, the debate was organized. In October of 2008, just as the stock markets were declining, the room was split about 50/50. A few months ago, FPA issued a variable annuity handbook. It is amazing what downturns can do to opinions. It is amazing what emotions do to behavior.

In his books, John compares what he refers to as the most common myths about mutual funds vs. variable annuities. Here are just a few:

FEES

His research indicates that the average mutual fund has approximately five percent in fees compared to the average variable annuity with 3.5 percent. Since these are averages, clearly there are mutual funds with both higher and lower fees and variable annuities with both higher and lower fees. With the advent of exchange traded funds (ETFs), the fee issue, I believe, is now clearly tilted in favor of the ETF vs. the variable annuity. But, that draws us to taxes.

TAXES during accumulation

For taxable (non-qualified) accounts, the ability to re-balance and accumulate without taxes is a clear benefit for the annuity. However, for both qualified and non-qualified accounts, the lifetime benefit riders provide an investment hedge that is more easily accessible to most investors than stock options and collars. The riders, not the annuities themselves, allow investors to remain invested.

TAXES during distribution

John's argument is that most retirees will pay approximately 15 percent of their income in income taxes, about the same as the current capital gains rate, and may be lower than the future capital gains rates. John cautions that ordinary income taxes should be referenced in total taxes paid, not in marginal income tax brackets. Someone making $100,000/year will pay approximately $15,000 in income taxes, regardless of what the last dollar loses in taxes.

LIQUIDITY

You can dictate liquidity by paying higher fees and having shorter surrender periods in most annuities. However, why pay the higher fees when the funds that you are allocating to the annuity should be for longer time horizons anyway. These retirement income funds should not require liquidity.

STEPPED-UP BASIS

Mutual funds held in a taxable account benefit from stepped-up basis (even in 2010, but potentially to a lesser degree, with modified carryover basis). Variable annuities and retirement accounts do not. However, they do benefit from the income in respect of a decedent (IRD) deduction, which does serve to level the playing field. The problem with IRD is that it gets spread out over the distribution period. So, for the typical "stretch" strategy, you don't get much benefit from each taxable distribution. However, don't forget about including life insurance in the portfolio to pay for the income taxes on retirement accounts and variable annuities, so you can benefit from IRD.

I love spirited debate. I am not in favor of closed-minds, like some advisors and journalists who believe that mutual fund fees, variable annuities, or life insurance cash value cause cancer. There is a proper place in clients' portfolios for all of the above, cash equivalents, individual securities, mutual funds, ETFs, variable annuities, fixed annuities, and life insurance.

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First quarter fixed annuity sales decline

U.S. sales of fixed annuities were an estimated $16.7 billion in first quarter 2010, according to data from the Beacon Research Fixed Annuity Premium Study. Sales were down 15 percent from fourth quarter 2009. Compared to the record-setting first quarter of 2009, results fell 52 percent.

By product type, estimated sales in first quarter 2010 were: book value - $6.8 billion; indexed - $6.7 billion; fixed income - $1.8 billion, and; market value-adjusted (MVA) - $1.3 billion. Results for all four product types were behind both the prior and year-ago quarters.

Relative to the previous quarter, MVA and book value annuities dropped 25 percent and 24 percent, respectively. Income annuities were down seven percent. Indexed annuity sales fell two percent. Year-ago results hit a record driven by book value sales, due to a flight to safety combined with a strong fixed annuity rate advantage. Compared to first quarter 2009, book value annuity sales were 64 percent lower. MVAs were down 80 percent. Income and indexed annuities declined six percent and five percent, respectively.

Book value annuities remained the dominant product type in first quarter 2010, but their 41 percent share was the lowest since third quarter 2007. The indexed annuity share of sales hit a 12-quarter high of 40 percent.

New York Life reclaimed sales leadership from Western National, which dropped to fourth place. Allianz moved to second from third place. Aviva jumped two notches to come in third.

By product type, New York Life also led in book value sales, replacing Western National, and remained the dominant issuer of fixed income products. Allianz was again number one in indexed annuities. Hartford replaced American National as MVA sales leader.

The Allianz MasterDex X, an indexed annuity, was again the quarter's best-selling product. The New York Life Preferred Fixed Annuity took second place and was the only book value product in the top five. It was followed by two indexed products: American Equity's Retirement Gold and Aviva USA's BPA Select 12. The New York Life Lifetime Income Annuity came in fifth. First quarter results include sales of some 425 products.

Three of these annuities also led distribution channel sales. MasterDex X was again the top independent producer product. The New York Life Preferred Fixed Annuity was the new bestseller in banks. Among captive agents, the New York Life Lifetime Income Annuity took top honors.

Credited rates increased slightly from fourth quarter, but their rate advantage was narrower relative to the conservative alternatives. Top multi-year credited rates were in the four percent range on interest guarantee periods (IGPs) of seven years or more. Rates at or above the threshold five percent level were available only for the first year of some multi-year and renewal rate products. Book value annuity sales moved to shorter IGPs, apparently because buyers expected rates to rise and did not want to lock in the quarter's low credited rates for long periods. MVA sales shifted from the middle to both shorter and longer IGPs.

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Signs of a new market paradigm for 'risk-proofed' VA products

by Frank Zhang and Amit Ayer

Frank Zhang is an executive director in the Insurance and Actuarial Advisory Services practice of Ernst & Young LLP's Financial Services Office. He is based in New York City and can be reached at 212-773-5450 or at frank.zhang@ey.com. Amit Ayer is an executive in the Insurance and Actuarial Advisory Services practice of Ernst & Young LLP's Financial Services Office. Based in New York City, Ayer can be reached at 212-773-7391 at amit.ayer@ey.com.

Risk management strategies with variable annuity products

Sales of variable annuities (VA) declined in the third quarter of 2009, dropping 1.9 percent to $30.6 billion, compared to $31.2 billion in the second quarter of 2009 and down 17.3 percent from third quarter sales in 2008 of $37 billion. Although the demand appears to be slowing for VA products across the industry in total, there are some select examples of companies that have increased their sales and market shares during 2009.

The drop in sales can generally be attributed to the fact that prospective VA consumers have had less money to invest after the equity market decline. The precipitous drops in the value of traditional investments and 401(k) assets have raised the individual investor's level of awareness of savings and retirement products that offer downside protection. Today, VA distributors are trying to capitalize on increased consumer awareness of VA guarantees and how those guarantees might protect consumers against future market volatility.

There will be a greater shift towards "risk-proofed" VA products by various market constituents including consumers, distributors, rating agencies, Wall Street analysts and regulators. Some constituents will demand strong risk and capital management, while others will focus on increased levels of transparency regarding the VA writers' risk management methods.

Better educated consumers

Recently, a significant shift has occurred in the mindset of consumers. In the old market paradigm, consumers were primarily sold products with the richest benefits and the lowest fees. Now, consumers are beginning to focus on the stability and long-term security of the companies and products in which they are investing, looking more towards security.

VA writers with a strong brand and a reputation for financial stability have, more than ever, a greater opportunity to attract customers. Consumers, working with their distributors, are gravitating towards the larger VA writers, as the largest companies are considered more likely to meet their obligations either in volatile markets or in distressed economic markets. As a result, VA writers who are able to either capitalize on their reputations or who are able to create awareness of their approaches to assure financial stability will be able to gain market share. As consumers become more informed and work with more sophisticated advisors, this trend toward considering VA writers with staying power will only accelerate.

Distributors look under the hood

In the bullish equity markets of 2002-2007, VA sales steadily increased. Many distributors, including independent firms and captive agents, focused on sales volume and product "richness", paying little attention to whether the benefit guarantees were in-line with cost, or whether the risks that the companies were underwriting could properly be managed to enable them to deliver the guarantees promised over the long term. At the time, the risks to the insurers that were embedded in these products were not a major concern of, or focus for, many distributors.

Clearly, the financial crisis has changed this. In the new market paradigm, distributors have a reduced appetite for excessive or exotic guarantees in their line-ups, particularly if they are likely to be withdrawn, suspended or amended. The more sophisticated VA writers are questioning whether guarantees are appropriately priced for their risk and will remain sustainable. More distributors and broker-dealers are requesting insight into their suppliers' enterprise risk management philosophies, methodologies and measurements, specifically around the degree and type of risk built into product guarantees. For distributors, moving large product volumes is a necessity, but having a constantly changing line-up of products because insurers find them unsustainable can create compliance and reputational issues.

Strong risk and capital management with transparency

In an era of heightened risk consciousness, distributors are more likely to establish partnerships with VA writers who have adequate or transparent risk management frameworks in place. In order to maintain their reputations as trusted advisors, distributors want to ensure that the guarantees in VA products they sell to consumers will be fulfilled.

In the new market paradigm, distributors are now paying closer attention to the ratings of the VA writers as determined by the rating agencies, which, in turn, have strengthened their requirements in risk and capital management practices. As the financial solvency of several major insurers was threatened during the market crisis, there is a heightened level of inquiry regarding risk management practices, strategies and capital management.

To increase risk and capital management transparency, VA writers need to address risk in their marketing messages. Higher benefits and lower prices must be explained in the context of the overarching value of disciplined risk management and the meaning of security in the post-financial crisis world.

In the old market paradigm, rating agencies would accept at face value that robust VA risk management frameworks were in place at major VA writers. Now, those same rating agencies, Wall Street analysts and regulators will ultimately require a more transparent depiction of hedging strategies, hedging operations and trading platforms. In the most recent earnings calls of the major VA writers, analysts have been asking more and more probing questions into how companies manage these product risks and related capital requirements.

VA writers can improve risk management transparency by benchmarking and reviewing hedging and risk management programs against industry leading practices. To meet the evolving demands of consumers, distributors, Wall Street analysts, rating agencies and regulators, companies should regularly review their hedge programs and conduct frequent independent assessments of their risk management practices. VA writers should align their products and risk management strategies with this paradigm shift exhibited by their customers and distributors.

Risk-proof the VA guarantees

More than ever, consumers will simply want their company to be there when the time comes to pay out any potential guarantee claims from their VA policies that may last many years. In today's new market paradigm, there is a greater need than ever for risk-proofed VA products to promote a sustainable market going forward. Robust risk and capital management frameworks by the VA writers will serve well all the constituents in the VA industry.

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Longevity Annuities: Microsoft at 80 cents per share?

by Laura Hahn

Laura Hahn is Managing Director, Annuity Center for The Marketing Alliance (TMA), St. Louis, Mo. She can be reached at 314-275-8713 or lhahn@themarketingalliance.com.

If only we could have seen the future in 1987�

I read an article recently announcing a very sad milestone: the second oldest person in the world (and the oldest in the United States) died March 7, 2010 at the tender age of 114 years and 294 days. Ironically, another young at heart passed away on the exact same day. She was only 113 years and 342 days young.

After learning this news, I thought of an industry tag line that we see all too often: "Guaranteed Income for Life." Imagine if these two individuals, both were women, had purchased a fixed annuity when they were just 55 years young. Think about it. No matter how you do the math, I believe that adds up to a great return of income for life.

Granted, we cannot all be as fortunate as these two ladies and have such a long and enjoyable life. But we should agree that the aging trend is certainly shifting, providing us with a greater chance of matching the longevity of the oldest person in the United States than ever before. If we have our health and an occupation we truly enjoy, we may not want to retire at 60, 65 or even 70-years-old, but don't most of us want the freedom to be able to have that choice?

Had I known that Microsoft would have the success it has had I would have bought shares at 80 cents. If I have a chance to live to 114-years-old (ok, realistically for me probably 99-years-old) isn't guaranteeing my income a good investment? After all, living a long, healthy life should be a good thing. I don't want my income to shut down before I do!

The Question to Ask

Ask your clients this question: Can you give me two reasons why you would not want to live as long as you possibly can? If they are honest with you, their answers just might be "I'm no longer in good health and I have no money left," and probably in that order. We can't help with the first answer but we have an obligation to help with the second. Fortunately, our industry continues to provide us with options to help us fulfill this obligation.

Longevity Annuities

One of the options is a longevity annuity. They are a good alternative for clients who would be reluctant to annuitize an immediate annuity or clients who are concerned about putting a large portion of their assets into an immediate annuity and no longer have the ability to utilize those assets if an emergency were to arise. They can even help with the number one objection many clients have for purchasing an annuity, the flip side, what if they die too soon after buying an annuity and they have given up a larger portion of their assets?

Longevity Annuities (also known as Advanced-Life Delayed annuities) allow your clients to protect against outliving their income with typically less money upfront due to the fact that these annuities don't start paying out for an extended period of time, such as 20 years.

Like all products, a longevity annuity is not for everyone. They are designed for your clients who expect to live a long life, understand buying future income at today's prices and/or don't want to invest a larger portion of their assets that may be required to purchase other types of annuities.

Your clients should also understand that there is a trade off. If they don't live to the age at which payments start there is no payment to their heirs or beneficiaries. These clients are making a buying decision with a smaller portion of their assets on the belief they will live for this period of time and they want to invest in that possibility. They enjoy life today and the use of their assets but they also want a back-up plan.

Think about your clients who are reaching or have just entered retirement. They may not want to admit it but more than once the thought has probably crossed their minds, "Am I going to be ok?"

Approaching Retirement with Confidence

Let's face it, retirement is a life changing event, no different than marriage, the birth of a child or a loss. As with any change, we have uncertainties. Whether your client sees retirement right around the corner or has already made the turn, chances are they are feeling uncertainty over what the future will hold. These clients probably would not feel completely secure with what they may view as giving up a large portion of their assets when they really don't know if they will need it. After all, they have no real experience yet in the retirement world. Because of the work we have chosen to do, we have the unique opportunity to educate these clients and provide them with alternatives and options to securing their lifestyle during years that should be "golden."

Yes, I think most of us who didn't buy shares of Microsoft at 80 cents sure wish we would have. While we may not be able to guarantee that our clients will live a long and healthy life, we can help them to be ready if they do earn the distinction as one of the oldest persons living. We can also remove the "if I had only known" about guaranteed income. Surely your clients can comprehend that if they were to be this successful at living a long life they'd want to do more to guarantee that their income would last as long as they do.

Another saying strikes me; while you can lead a horse to water, you can't make him drink it. Consider this: we all know what will happen to the horse if someone doesn't get that horse to drink. We have all heard the statistics by now: the aging boomers, the assets they hold, the impact of the economy on retirement dreams and so on. It has never been more clear that our role, our profession, our obligation is to save one financial retirement life a day. Even our own.

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Variable Annuities inch upward

After a decline of 26 percent in the first six months of 2009, variable annuities (VA) were only down 18 percent for the year, as quarterly VA sales slowly improve from the first quarter.

According to LIMRA's U.S. Individual Annuities quarterly sales survey, VA sales improved slightly in the fourth quarter as compared to the third quarter, up three percent to $32.6 billion but were down three percent when compared to the fourth quarter of 2008. VA sales totaled $127 billion.

"The last time VA sales were at this level was in 2003, at the end of the last financial crisis," said Joe Montminy, assistant vice president and research director for LIMRA's annuity research.� "VA sales experienced significant losses from the third quarter of 2008 through first quarter 2009 and while we are seeing VAs begin to recover, the recovery is slower than expected. We attribute this partly to a decline in 1035 exchanges."

Overall individual annuity sales fell in the fourth quarter, down two percent as compared the prior quarter, to reach $53.3 billion. This is a 22 percent decline from the fourth quarter of 2008. Total individual annuity sales declined 11 percent in 2009, to reach $234.9 billion.

In fourth quarter of 2009, fixed annuity sales continued to decline, down 10 percent as compared to the prior quarter and down 40 percent from the fourth quarter of 2008, where fixed annuities experienced incredible growth. Fixed annuity sales totaled $20.7 billion in the fourth quarter and $107.9 billion for the year, which was a one percent decline from 2008. LIMRA predicts fixed annuities will remain depressed as long as interest rates remain at current levels, CDs are just too attractive in this environment.

In 2009, indexed annuities had a record year, increasing nine percent, reaching $29.4 billion, as compared to 2008. Indexed annuities performed very well throughout the year, with a record-high in the second quarter. Indexed annuities fourth quarter sales were down five percent from the third quarter, totaling $6.9 billion.�

For the third consecutive quarter, book value declined as compared to the prior quarter, down 10 percent from the third quarter and 43 percent as compared to the fourth quarter of 2008. For 2009, sales of book value annuities are up two percent benefiting from a very strong first quarter.�

Fourth quarter MVA sales were down 35 percent from the third quarter and declined 80 percent as compared to prior year. 2009 MVA sales finished 20 percent lower from 2008 totals.

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Going Long

How longevity impacts the annuity market

by Herb Daroff

Herb Daroff is associated with Baystate Financial Services in Boston. He is a contributing editor for LIFE&Health Advisor. Daroff can be reached at hdaroff@baystatefinancialplanning.com.

Prior to the most recent stock market turmoil (not to be confused with the turmoil of 1987 or 2001 or, for that matter, 1929.) annuities had more critics than proponents. Obviously, critics have very short memories.

After the financial debacle of last year, annuity advocates came out of the walls. Clients and their advisors wanted fixed pension incomes to replace market fluctuations. These were the same people who were unimpressed with 10-12-15 percent returns in the roaring 1990s expecting 20-30-40 percent on every stock they day-traded. Remember them?

While a fixed (and low) interest rate may appeal to some retirees, others with longer time horizons recognized the problems of reduced purchasing power with fixed income net after taxes and inflation.

KEY PLANNING CONSIDERATION

Loss of purchasing power is more critical than loss of principal

They discovered variable annuities with guaranteed income benefit riders and guaranteed withdrawal benefit riders. These provide a low interest rate floor instead of the low interest rate ceiling of fixed annuities

Last year, for those clients who did not have the investment hedges provided by variable annuity riders, we were trying to defend our portfolio losses. I did not get into this business to help clients lose less. Clients who thought their risk tolerance was seven to eight out of 10 became "recovering sevens". They realized that their risk capacity was more like a three. These investors all wanted to steal second base, but with one foot firmly planted on first.

Those investors with sufficient funds covered by variable annuity riders did not lose "retirement income" value. So, as the demand for variable annuities with guaranteed riders increased, the supply was severely decreased.

The insurance companies offering these variable annuities and their riders became increasingly concerned about the higher interest rates they had guaranteed. The spread between the fair market value of the accounts and the "retirement income" value had increased significantly. As a result, they:

NOTE: There are exceptions-companies who have maintained low costs and frequent, even daily, resets.

There are also far fewer providers offering these products.

Why are annuities increasingly more important? People are living longer. A long time ago, the concept of retiring at 65 was to enable a worker to enjoy a few years of leisure retirement, before dying by 67 to 75. Social Security was based on statistics like that. You remember Social Security, the largest unfunded pension liability in the world. Today, insurance company mortality tables run to 125. The required minimum distribution tables for retirement income run to 115. Many people will be retired for a longer period of time than they worked. Therefore, the most important financial planning objective for many is to make sure that their wealth doesn't go to zero before their blood pressure does.

Why are variable annuities with income and withdrawal riders increasingly more important? Stock markets stumble from time to time. Interest rates are at all time lows. Albert Einstein once said that the greatest force in nature is compound interest. However, at one to three percent it's not all that powerful. And, bank or money market interest is better than negative returns in an investment portfolio.

So, for investors interested in Aggressive Growth with Conservative Risk (see above, stealing second with one foot firmly planted on first), the hedges provided by variable annuity riders should be considered.

INCOME BENEFITS

Generally speaking, a guaranteed minimum income benefit:

Protects lifetime income;

Interestingly enough, the typical variable annuity may never actually payout an annuitization of principal and interest. Instead you can turn on the faucet and receive five percent or six percent or seven percent of the greatest of the account value, the highest reset value, see below, or the five to seven percent compounded value.

Captures market gain;

The account value is reset periodically, which varies from daily to weekly to monthly to annually on the anniversary of the contract. However, you may be restricted on how your account is allocated between various investment classes. Some products give the right to re-allocate the asset allocation to the insurance company based on a series of triggering events, which may be beneficial to the annuity owner. It is certainly beneficial to the insurance company who uses this right to manage its risk, the spread between the fair market value of the assets and the "retirement income" value.

Manages market declines;

Basically, heads your win, tails you stay the same and actually grow by five to seven percent. Your "retirement income" value will never be less than the original amount contributed less withdrawals.

Provides legacies to your heirs.

Annuities have death benefits. The income can continue to your surviving spouse and issue or any other beneficiary.

Who wouldn't want that? At any price? Oh, there's the rub! The cost of these riders ranges from 50 basis points (0.50 percent) to 150 basis points (1.50 percent), or even higher. And, this fee is on top of the investment management fees and other administrative expenses. Clearly, the prospectus must be read (studied) before making any decision, and compared with other products. Then, have a referee (CPA, Attorney, Financial Planner, etc.) help you decipher the differences so that you can make an intelligent decision.

I recall a client of ours who contributed $100,000 to a variable annuity on September 1, 2001. After September 11th that value was much smaller. I believe that the anniversary value September 1, 2002 was something like $65,000. However, the "retirement income" base was $106,000 (six percent increase over the initial contribution because of this rider). And, the $106,000 income base is NET of all fees and expenses.

This worked in 2009, too.

WITHDRAWAL BENEFITS

Generally speaking, a guaranteed withdrawal benefit:

Maximizes immediate income;

You withdraw seven percent, for example, for a period of 14-15 years = 100-105 percent of the principal sum at the beginning of the withdrawal, regardless of market performance. So, this rider guarantees principal.

Captures market gains;

If the market never goes up again, you are guaranteed to receive your initial contribution back. However, if the market value is higher than the originally contributed amount on a reset date, then you lock in that new value and will receive seven percent for 14-15 years of that once you turn on the withdrawal.

Pursues investment growth; and

The flexibility to select individual assets or asset classes is generally broader in the withdrawal benefits than in the income benefits.

Protects your heirs.

Remember, annuities are only a part of a well diversified portfolio. Clients should have four accounts:

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In Search of Safety

As Americans re-think their investment strategies,
new annuity designs build in stronger guarantees

by Gary C. Bhojwani

Gary C. Bhojwani, President and CEO of Allianz Life Insurance Company of North America. He can be reached at gary.bhojwani@allianzlife.com.

For most consumers, the prospect of retirement planning is not the same as it was before the financial meltdown that began in 2008. Everyone's trying to make sense of dramatic changes in the financial landscape, especially equity market losses, significant declines in 401(k) values, and low returns on fixed-rate instruments such as CDs. Consumer confidence is improving, but understandably low. Unemployment and home foreclosures now appear on the list of worries, often ahead of retirement savings.

My company, in conjunction with Synovate Research, conducted a recent survey about New Year's Resolutions. It shows Americans continue to have mixed feelings about their own financial future, as well as the country's. When asked what type of expert professional service they would most like to use, 40.7 percent chose a financial expert compared to only 27.3 percent who said they wanted personal trainer. Financial guidance was of particular importance to the youngest and oldest generations surveyed, with 43.4 percent of the 18 to 24 group choosing financial expert, and 42.4 percent of those 65 and up.

In the past, Americans relied on retirement plans comprised principally of Social Security, pension funds, savings and investments, such as traditional stock market funds. For many, a plan made of this mix is no longer valid. The types of changes Social Security will undergo in the future are unclear and most pensions have disappeared. Recent stock market declines have given investors a new appreciation for the risk of traditional stock market investments. Americans are realizing that guarantees and principal protection are important components of a solid retirement plan.

As a result, people are scaling back spending and managing finances more carefully than ever, looking for strategies to keep them sheltered from the storm. In October 2008, 35 percent of affluent retirees said that a guaranteed income payment stream is the single most important factor when choosing a retirement solution, up from 23 percent just two months earlier.

In these turbulent times, reliability is refreshing rather than boring. Before 2008, Americans were energized by the growth in the stock market. Now more people are concluding that a significant portion of savings should be protected with a guarantee, even if that means more moderate growth during market highs.

How do we help mitigate the risks? There is only a 0.9 percent risk that we will die in a year. So we work out, we eat healthy, we don't want to die. To transfer some of that risk away, we purchase life insurance.

While there is only a 1.2 percent chance of an automobile accident, we drive safely, we wear seatbelts, and we purchase auto insurance.

To mitigate the risk of losing our home we have smoke detectors, and alarms. We purchase home owners insurance to mitigate the risk of this loss.

Loss of market value in any one given year was 28 percent. Certainly much higher than any of these other areas. We are purchasing life insurance, auto insurance, home owners insurance to transfer risk, why not consider, for a portion of our assets, the ability to transfer some of that risk from our portfolios with the purchase of an annuity. Optional protection benefits offered in annuities help provide the protection and can be purchased for an additional cost. Product guarantees are based on the financial strength and claims-paying ability of the issuing company.

Annuities: smart financial tools for an unpredictable future

In this environment, annuities are garnering more positive attention. As the only financial instruments that provide guaranteed income for life, annuities are unique. But consumers unfamiliar with annuities may wonder: "Is an annuity right for me? What should I buy? What should I know?"

While many people are focused on asset accumulation, our American Legacies Study shows that most want more than just a "pile of money." They need an effective means to create secure income for what may be many years of retirement, with all manner of risks and uncertainties. When making any type of change to a financial plan, consumers should step back and ask fundamental questions about whether the financial plan meets their specific short-term and long-term goals. The first step is to work with a trusted financial professional to guide a balanced approach to the individual's needs and wants.

Today's economic conditions have underscored the importance of a diversified financial plan that may include annuities, which offer guaranteed income for life. Annuities can help reduce market risk. They offer unique protection features, and are good long-term financial instruments. In any economy, stable or otherwise, a product that offers guaranteed lifetime income is very appealing.

Annuities in a life-stage context

Many criteria play into financial planning decisions: age, net income, assets, monthly expenses, and beneficiaries, but age is one factor that can help define what's appropriate.

Seniors - Those nearing retirement may want to put a larger percentage of their assets in products that have guarantees, as long as they are comfortable with contract restrictions that may affect the timing and amounts that can be withdrawn or distributed. For individuals who are in their 60s or older, the ability to leave some assets untouched may make annuities a smart choice. In fact, 78 percent of owners of nonqualified annuities intend to use their annuities for retirement income. The annuity will benefit from tax deferral and the death benefit may allow customers to pass along funds to their beneficiaries.

Middle-aged people - Forty and 50-year-olds with a longer term horizon should consider that annuities have a favorable tax status and are good long-term financial instruments. If you fall in this age group, evaluate the growth potential of a tax deferred vehicle versus a taxable one.

Younger people - For younger people, those in their 20s and 30s, saving money in a systematic, disciplined way is an important strategy. Many younger people do not have a defined benefit plan and annuities may be a good alternative because of their ability to generate tax deferred income. If you're in your 20s or 30s, making an annuity part of your financial strategy, along with IRAs and 401(k)s, may be a good first step towards a more secure financial future.

Next Steps

The new economic environment has forever changed how Americans evaluate risk and acceptable returns, and a long-term financial strategy is more important than ever. Because annuities can offer a guaranteed income for life, they can make a sound addition to a diversified plan for a consumer in any stage of life.

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Variable Annuities: Still ideal for Boomer retirement income

by Terry Mullen

Terry Mullen is President of Sun Life Financial Distributors, Inc., in Boston. He can be reached at terry.mullen@sunlife.com.

Variable annuities (VAs) are gaining more widespread respect. The guarantees that critics said were not worth the added basis points have kept annuity investors above water. Step-ups to help clients generate sufficient retirement income have helped lock in account gains. And bonuses ranging from five to seven percent have, in hindsight, helped investors beat the market while keeping their retirement income safe from market risk.

You would think that would soothe the naysayers, but new criticisms have emerged: bonus rates are shrinking, guarantees are not as good as they were. Despite this new rhetoric, VA sales are rebounding. According to the Insured Retirement Institute, VA sales for the second quarter were $31.8 billion, up from $30.4 billion in the previous quarter. Second quarter 2009 net sales were $6.1 billion, compared to first quarter net sales of $5.1 billion and combined net VA assets rose to $1.19 trillion.

The underlying need for, and strengths of, VAs have not changed. We are still approaching one of the most significant demographic shifts in our history with the forthcoming Boomer retirement wave. This is a population with unique financial needs that a VA with a living benefit can help meet. Even with their recent modifications, VAs offer tremendous value to this vitally important market segment, and the recent sales numbers illustrate that advisors and investors understand this opportunity. Now is not the time to scale back VA sales; if anything, their performance during the current financial crisis helped save Boomers millions and validates their importance.

VAs: Still a unique product

The VA arms race is over and carriers have revised their products to reflect the new economic and market conditions. So, why are VAs still worth it, even if investors can't get the same bonuses and deals that were available just a few months ago?

Because no other product provides the same protection against inflation, longevity and market risks that a VA does. With the new emphasis on financial protection and guaranteed retirement income, the outlook for VAs has never been better. Even with their recent modifications, living benefits can give investors a comfort and predictability that is reassuring in the current environment.

Many investors, concerned about the market, have fled into safer investments like CDs. CDs are selling well now and can be the right product in some instances, but locking an investor in a long-term CD with current interest rates can be a disadvantage. Conversely, the investors who have recently purchased VAs may be getting reduced benefits from a year ago, but they're buying an equity-related product that has an excellent potential to rise with the market.

With an aging population that has endured significant losses in their defined contribution plans, and a public that has a tenuous view of the viability of Social Security, VAs remain the only product that can guarantee lifetime income with downside protection.

Selecting a carrier in today's landscape

The other major change in the landscape is how advisors and investors select a VA carrier. In the recent past, both parties largely selected a carrier based on name recognition, the product range and perhaps other items like compensation. Some carriers have faced financial difficulties, and investors are now asking more questions about how VAs and their guarantees work. With this in mind, there are new attributes carriers need to have to stand up to investor and advisor scrutiny.

Product features remain an important factor. Unlike the arms race mentality of a couple of years ago, the scaling back of many features, like deferral bonuses and quarterly step-ups, has made it a bit easier to survey the carrier landscape. Make sure to compare items like age-tiered withdrawal percentages, deferral bonuses and annual costs carefully. Also review the subaccount options carefully to make sure there are sufficient investment options in each VA, they are well-ranked by ratings agencies and the asset allocation models are appropriate.

A new emphasis is financial strength. Previously, reviewing items such as carrier credit ratings, investment portfolios and 10Ks was an afterthought, if it was done at all. Given the stress in the financial sector, this is now extremely important. Investors want to be sure that the insurance company is still going to be around in 10 or 20 years when they decide to annuitize or start taking income withdrawals. Advisors want to be sure the carrier has a diversified portfolio and does not have significant exposure to structured products or risky investments. With a �flight to quality� underway, financial strength ratings from agencies like A.M. Best and Moody's have moved to the front of the line in importance.

The VA world has certainly changed, but the insurance industry remains financially strong and well-poised to capture market share as the needs of the Boomer population's shift from retirement savings to retirement income. The demographics and fundamentals that drive the product need are unchanged, and VAs remain an excellent choice for investors who want a guaranteed retirement income they can never outlive. The key for advisors is understanding that VAs continue to be a superior choice for most investors, and how they judge carriers needs to adjust in light of current economic and market conditions.

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Fixed annuities sales rise in Q2

U.S. sales of fixed annuities reached an estimated $27.8 billion in second quarter 2009. Quarterly sales were 10 percent higher than those of second quarter 2008, but 20 percent below the previous quarter. On a year-to-date basis, total market sales were an estimated $62.6 billion, 39 percent above first half 2008.

By product type, data from the Beacon Research Fixed Annuity Premium Study estimated sales in second quarter 2009 were: book value - $14.0 billion; indexed - $8.2 billion; market value-adjusted (MVA) - $3.5 billion, and; fixed income - $2.2 billion. With the exception of MVAs, these estimates reflect increases from second quarter 2008 in all product types.

Indexed sales grew 20 percent, while book value and fixed income annuities were up 10 percent and two percent, respectively. MVA sales fell five percent. From the prior quarter, indexed results improved 16 percent. This brought the indexed annuity share of sales to 30 percent, reversing a five-quarter decline but still below 2007 levels. Income annuities were up 12 percent quarter-to-quarter. MVAs dropped 47 percent, while book value products fell 27 percent.

Estimated year-to-date product type sales were: book value - $33.2 billion; indexed - $15.3 billion; MVA - $10.0 billion, and fixed income - $4.1 billion. Relative to first half 2008, there was double-digit growth in all product types except fixed income. MVAs were 68 percent ahead, book value products were up 48 percent, and indexed annuities advanced 22 percent. Fixed income sales rose four percent.

New York Life advanced to first from second place to reclaim sales leadership from MetLife. Aviva USA moved up a notch to replace it in second place. Allianz jumped four spots to come in third. AEGON/Transamerica advanced to fourth from fifth place. American Equity rejoined the top 10 and came in fifth.

In sales by product type, American National was the new MVA sales leader, replacing MetLife. New York Life remained tops in book value and fixed income annuities, and Aviva continued as the leading indexed annuity issuer.

New York Life took top product honors with its Preferred Fixed Annuity (a book value product). Allianz rejoined the top five with MasterDex X (an indexed annuity) in second place. Another New York Life book value product, NYL Fixed Annuity, moved down a notch to come in third. Income Select Bonus, an Aviva-American Investors Life indexed annuity, remained in fourth place. Coming in fifth was Pacific Life�s new book value product, Pacific Explorer. Second quarter results include sales of some 410 products.

Two of the top five annuities led sales in a distribution channel as well. New York Life had the top bank channel product once again, with NYL Preferred Fixed Annuity replacing NYL Fixed Annuity. The Allianz MasterDex X became the new bestseller among independent producers. RiverSource Life�s Rate Bonus 1 (a book value annuity) remained the leading captive agent product. MVAs led sales in all three broker-dealer channels. American National�s Palladium MYG reclaimed top honors in the independent B-D channel. Pacific Life�s Pacific Frontiers was the new wirehouse bestseller. MetLife Target Maturity continued as the top product in the large/regional B-D channel.

Credited rates were low and declined somewhat over second quarter. It was increasingly difficult to find annuities crediting at the threshold five percent level. The highest available rates were found either on renewal rate products with shorter initial interest guarantee periods (IGPs) or on longer non-renewal rate terms.

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Annuities and the search for a new 'normal'

by Tom Buckingham

Tom Buckingham is senior vice president, Life and Annuity Product Development for The Phoenix Companies, Inc. He can be reached at thomas.buckingham@phoenixwm.com thomas.buckingham@phoenixwm.com.

From what I read, hear and see, the news from the financial front gets a bit better every day. How could it not? Indices have risen, housing starts are increasing, consumer confidence is on the upswing and there is a general sense that the nation is shifting its focus from gloom to opportunity.

You could also say that this notion of opportunity comes with an asterisk. Yes, there may be opportunity and people have historically looked to ride the roller coaster when it's rising. But the market is cyclical and as you ride you know somewhere there's going to be a drop. You just don't know when, and how fast the drop will be.

People (especially investors) really don't have the stomach anymore for the arcane, risky and expensive. A back-to-basics move is taking over many parts of our society, including investing. People are getting back to what matters most.

In a sense, we are headed toward a "new normal." It seems that most people's take on investing has been forever changed.

What better time than now to re-examine annuities, for the sake of your client's portfolios, and their lives. One reason annuities are, and should be, part of the investment mix is that they allow us to use a word that is foreign to most investors today: guarantee. Annuities are one of the rare retail financial instruments with an actual guaranteed income stream, something you won't find with mutual funds or equities.

There's nothing more uncomplicated and straightforward than a guarantee. Simple products with simple guarantees will be part of this new normal.

Granted, insurance companies were known for some complex financial instruments and guarantees that may not have been easily understood by either advisors or investors. But the industry has seen the light. We have come to understand that there is power and comfort in simplicity.

Speaking about a guarantee in this financial climate may seem to be anathema. The mere word raises eyebrows in today's world, in which trust and credibility have been tested like never before. Most clients will politely show themselves to the door if you use this word lightly.

But, yes, the guarantee is what makes annuities so attractive. Especially as the notions of retirement and longevity have changed for good. As you know from your work with your clients, no longer is retirement a 10-20 year period that marks the true end of work. And with government statistics showing that 77 million people will be of retirement age in the next five to 10 years, it's more important than ever to protect the income that people count on for this period.

Annuities can help you and your clients get back to basics, focus on the fundamentals and, at the same time, successfully achieve the basic principles of investing: protecting money and properly planning for retirement and life events, in a way that they can trust.

We've always known of annuities' tax-deferral benefits, but, as a critical mass of our market shifts from accumulation to payout, the primary focus becomes the confidence that your clients' money will be safe during that increasing window of retirement years.

At the same time, many types of annuities allow your client the ability to take advantage in any rise of the markets.

As many of you know through your daily work with clients, these annuity guarantees fall under the umbrella concept of "living benefits." These living benefits are a major advantage of the annuity: providing appropriate amounts of upside in addition to the important layer of income protection.

The annuity industry continues to focus on three primary forms of living benefits in response to consumer demand for greater flexibility and access: Guaranteed Minimum Income Benefit, Guaranteed Minimum Withdrawal Benefits and Guaranteed Account Value.

And while these may differ in their form, their function is the same: to protect the important income stream in a redefined retirement period.

Protecting income in such a vital life stage is so important, that the notion of the guarantee has been adopted from annuities and added to other financial products as a stand-alone feature. We have seen the worlds of annuities and asset management come together to create hybrid products that offer a guaranteed living withdrawal benefit. This convergence hits the sweet spot between familiar investment products and income protection.

Stand-Alone Living Benefits come in different forms, whether it's "portfolio insurance," "synthetic annuity" or an "unbundled living benefit", but the concept of SALBs is one whose time has come. We know that money managers and other product partners would like to offer a guarantee on top of their more traditional asset management vehicles. In these types of arrangements, the insurance contract is separate from the asset, and can be applied or removed when desired.

In short, they provide more security in an insecure time. And, they expand the market potential for both carriers and asset managers. We just went through the roughest financial period most of us have seen in our lifetimes. That makes it a good time to consider products that will smooth the roller coaster ride ahead.

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Total annuity sales decline in Q2

Total quarterly individual annuity sales dropped to $60.5 billion in the second quarter, down nine percent from the first quarter of 2009 and 11 percent below the second quarter of 2008.

According to LIMRA's U.S. Individual Annuities quarterly sales survey, during the first six months of 2009, total individual annuity sales fell three percent over 2008, totaling $126.8 billion. Year-to-date, fixed annuity sales rose 39 percent to $64.2 billion while variable annuity (VA) sales fell 26 percent to $62.6 billion, as compared to the first six months of 2008.

"Second quarter fixed sales fell quarter-over-quarter due to a decline in fixed annuity interest rates and their corresponding spreads in addition to annuity companies pulling back on issuing new business due to capital," said Joe Montminy, research director for LIMRA's annuity research. "Meanwhile, VA sales improved quarter-over-quarter as VA sales have a tendency to follow the stock market plus there was a strong demand for the guarantees offered on many VA riders."

VA sales reached $31.9 billion in the second quarter and experienced a shift when compared to first quarter results, increasing four percent. This was the first improvement in quarter-over-prior quarter VA sales since the second quarter of 2008. However, VA sales declined 24 percent when compared to the second quarter of 2008.

Second quarter fixed annuities sales hit $28.6 billion, down 20 percent from the first quarter of 2009 but 11 percent higher than the second quarter of 2008. Fixed annuity sales have not declined on a quarter-over-quarter basis since the first quarter of 2007. Sales of book value products fell 25 percent from last quarter but improved 17 percent from one year ago, recording a 53 percent growth year-to-date. MVA annuity sales were cut in half compared to the first quarter of 2009 and were down six percent compared to the same quarter last year but still increased 76 percent in the first half of 2009.

Indexed annuities saw 14 percent growth for the quarter, resulting in a record high of $8.1 billion in sales, which propelled year-to-date indexed annuity sales up 20 percent to $15.2 billion.

Second quarter election rates for VA Guaranteed Living Benefits (GLBs) that elected any GLB, when available, remained steady at 88 percent. Election rates for the GLWB rider, the most popular rider, rose to a record high of 59 percent despite many VA companies raising fees and decreasing benefits on their GLWB riders during the first half of 2009.

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Indexed annuity sales set record for Q2

Indexed annuity sales set a new record in the second quarter of 2009, according to a report from AnnuitySpecs.com. Total second quarter sales were $8.3 billion, up 21.2 percent from the same period last year. As compared to the previous quarter, sales were up 18.3 percent.

Forty-seven indexed annuity carriers participated in the 48th edition of the Advantage Index Sales & Market Report, representing 99 percent of indexed annuity production.

"This is a record quarter for indexed annuity sales," said Sheryl J. Moore, President and CEO of AnnuitySpecs.com. "Never has there been a more challenging period for those selling indexed annuities. Scarce capital has resulted in most carriers making changes to their annuities including commission reductions, premium bonus reductions, increasing minimum premiums, and dropping issue ages. We've even seen folks terminating distribution and halting new agent appointments. Despite these challenges, Americans have spoken, and indexed annuities are the product of choice." Moore projects record-setting sales for the remainder of 2009, despite the challenging market.

For indexed life sales, 32 carriers in the market participated in the Advantage Index Sales & Market Report, representing 100 percent of production. Second quarter sales were $132.4 million, an increase of nearly 26 percent from the previous quarter and three percent from the same period in 2008.

"The indexed life market is finally improving, since the disruption due to the 2001 CSO transition," Moore said. "And because of the decline of the equities markets, and the guarantees that Americans are seeking, we're going to see more companies entering the indexed UL market. No other product is as strategically positioned to provide downside protection and upside potential during a volatile markets. I predict record sales this year."

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151A-The battle continues

by Mike Janky, CLU, ChFC, CFS, CAS, RHU, CASL, IAR

Mike Janky, CLU, ChFC, CFS, CAS, RHU, CASL, IAR, is president of Forward Strategies, an annuity marketing organization located in Tucson, Ariz. He can be reached at mjanky@fsib2000.com

In December of 2008, the Securities and Exchange Commission offered their support for controversial rule 151A. This rule is designed to make indexed annuities classified as a securities product and thus these products would need to be sold by prospectus from a registered representative.

What the SEC has done is touched off a heated debate that would see a lawsuit filed against the SEC and have the ruling currently in the hands of the United States Court of Appeals for the District of Columbia Circuit.

On May 8, 2009, a three-judge panel comprised of Chief Judge David Sentelle, Judge Douglas Ginsburg and Judge Judith Rodgers heard arguments from both the SEC and the Coalition who had filed the suit. This Coalition is made up of a number of insurance carriers and IMOs and by the National Association of Insurance Commissioners (NAIC) who had filed their own suit but was consolidated with the Coalitions' suit. The panel is expected to rule on this as early as late summer. It would appear that there are likely three possible rulings on this case.

There is also the chance that this ruling from the Appeals court be appealed to the United States Supreme Court. If the Supreme Court declined the appeal, then the ruling of the previous court would stand.

Based on numerous conversations I have had with people close to the situation, it appears that there is a good chance 151A will be overturned and never enforced.

There is also some activity in Washington. On June 4, 2009 H.R. 2273, "The Fixed Indexed Annuities and Insurance Products Classification Act of 2009" was introduced. Should this pass the house and senate and be enacted, it would repeal SEC Rule 151A.�So the battle for control of indexed annuities is currently deep in the trenches.

What I find interesting and unfortunate is that at the end of the day, should 151A prevail and be enacted, the real loser will be the end consumer. Having been involved in the securities world for almost 20 years, I have seen first hand many people see their net worth decrease dramatically because they were under the delusion that there is very little downside in investing in the stock market. After all, doesn't the stock market average close to double digit returns in the long run?

I am not saying there haven't been many fortunes made in the market, but as we all know, there have been many lost as well. What it comes down to is how much risk a person is willing to take for the possible returns. For people in their 60s,70s and even 80s, the indexed annuity can offer a chance to outpace inflation and get a fair rate of return, without risking their principal.

The SEC has stated that it believes there is risk in these products because there is a chance that a person might do better than the stated guarantees. Now, to me this sounds pretty far fetched. I believe the average person with average intelligence would view risk as the loss of principal, not the loss of possibly making more money. Facts are facts and with indexed annuities, there has never been a penny of principal lost in a policy. How many people can say that who have been in mutual funds, individual stocks, variable annuities, Limited Partnerships, etc.

Indexed annuities are certainly not the cure all and are not appropriate for every person. Investors with longer time horizons willing to risk principal, would probably find the indexed annuity a little too safe and boring. They are not going to get huge returns comparative to being in the market. However, I have seen years in the 90s in these indexed annuity products where clients have locked in returns as high as over 30 percent for a one year period. The key in these products is to understand what they are and are not. They are not 100 percent participation in the market. After all, you are not actually in the market, you are tied to or linked to an index that in part will help determine how much interest you will earn. The major focal point of these products is to give you some upside potential of being linked to an index without the downside risk of losing your principal because that index collapsed. The contracts themselves are backed by the issuing insurance company.

You also have to remember that the battle over 151A is not for a few peanuts. There are billions of dollars each year put into these products which are responsible for a lot of revenue. Should 151A become policy, you will see many carriers exit the indexed marketplace because they cannot compete with larger companies who have solidified a place on the approval list of major broker/dealers. Remember, if 151A is not repealed, then the indexed annuity will have to flow through a broker/dealer. This would also not be good for the client as product selection will decrease and most likely become more confusing instead of less confusing.

Another loser will be the agent. Now instead of being paid by the insurance company, the commission will flow through the broker/dealer who will obviously take a percentage. So the agents who were helping clients protect their assets will see their own income decrease even if they do the same volume. Looks like the only real winner will be the broker/dealers who then will be getting a percentage of the commissions for what, I am not really sure. The average broker/dealer is not staffed for handling questions on these products and probably will have had little or no previous exposure to indexed annuities.

Like everything else, there are some really good indexed annuities and then there are some that are not so good. Understanding the differences can make all the difference in having a very satisfied client and one that can make your life miserable.

How 151A plays out will be of great interest to the insurance companies, the SEC, registered representative and traditional independent agents. Its' impact on the insurance industry could be devastating. It could also force out the independent agent who has been able to build his/her practice and now will have to decide whether getting a securities license is worth the trouble. Not all agents want to be full fledged planners.

One thing is for certain, the battle is far from over. Even if 151A is repealed, there will be other attempts on the insurance industry to siege control, and the battles will continue.

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Beware the tax trap on a Non-Qualified 1035 Exchange

by David Olsen

Dave Olsen, CLU, ChFC, is Annuity Brokerage Manager at First American Insurance Underwriters, Inc., Needham, Mass. He can be reached at dolsen@faiu.com or at 800-444-8715.

How many times have you recommended that your client make a tax--free exchange of life insurance or annuity policy values for the purchase of a second annuity? If you are not careful how the check is made out, your client may be in receipt of a taxable distribution.

According to Internal Revenue Service Code Rule 2007-24, the client's receipt of a check issued by an insurance company under a non-qualified annuity contract is treated as a taxable distribution, even if the check is endorsed to a second insurance company for the purchase of a new annuity.

FACTS

As an example, suppose your client owned a non-qualified annuity issued by Insurance Company A. You directed Company A to send a check for consideration for a new annuity contract directly to Insurance Company B. You intended that the transaction be treated as a tax-free exchange under section 1035(a)(3) of the Internal Revenue Code. Instead, Insurance Company A issued the check to your client. The client did not deposit the check, but instead endorsed it to Insurance Company B as consideration for a new annuity contract. Insurance Company B happily accepted the endorsed check and issued the new policy.

In this example, the transaction is not characterized as a tax-free exchange under Section 1035(a)(3) of the Code. Why? There was no direct exchange or assignment of the original contract.

ANALYSIS

Section 72(a) of the IRS Code provides that (except as otherwise indicated in Chapter 1 of the Code) gross income includes any amount received as an annuity under an annuity contract.

Under Section 72(e), amounts received under an annuity contract, but not as an annuity, generally are included in gross income to the extent allocable to income on the contract. That is, they are taxed on an income-first basis. Section 72(e)(5)(E) provides that this rule applies to any amounts received on the complete surrender, redemption, or maturity of an annuity contract.

In Revenue Ruling 72-358, 1972-2 C.B. 473, a taxpayer who owned a life insurance contract issued by one insurance company assigned the contract, prior to its maturity, to a second insurance company in exchange for a variable annuity contract issued by the second company. The Ruling concluded that pursuant to Section 1035, no gain or loss was recognized on the exchange.

Similarly, Revenue Ruling 2002-75, 2002-2 C.B. 812, also concluded that an individual's assignment of an annuity contract issued by one insurance company to a second insurance company, which then deposited the cash surrender value of the assigned contract into a pre-existing annuity contract owned by the same taxpayer, qualified as a tax-free exchange under Section 1035.

In the above example, there was no actual exchange of annuity contracts; nor did the client assign the original contract to the new contract; and there was no direct transfer from Company A to Company B of the cash value of the old contract in exchange for the new contract. Instead, Company A disbursed a check to the client, who in turn, endorsed it to Company B as consideration for a new contract. Neither Section 1035 nor the regulations make any special provision for the purchase of an annuity contract with amounts distributed to the policyholder under another contract. Because the annuity contract was a non-qualified contract, no rollover provision, such as Section 403(a)(4), applied to the amount received from Company A. Accordingly, the amount that the client received from Company A under the first annuity contract is taxable to the extent set forth in Section 72(e).

CONCLUSION

If a taxpayer receives a check from a life insurance company under a non-qualified annuity contract, the endorsement of the check to a second company as consideration for a second annuity contract does not qualify as a tax-free exchange under Section 1035(a)(3). Instead, the amount received is taxable to the extent set forth in Section 72(e). To avoid this tax trap, be sure to follow the rules.

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Will 151A spell doom for Annuity Insurance Agents?

by Mike Janky

Mike Janky, CLU, ChFC, CFS, CAS, RHU, CASL, IAR, is president of Forward Strategies, an annuity marketing organization located in Tucson, Ariz. He can be reached at mjanky@fsib2000.com

In the spring of 1995, indexed annuities made their debut in the annuity world as a prudent alternative to investing in the market. Their success was limited for the first few years as the stock market enjoyed a relatively smooth climb. Beginning in March of 2000, these products increased in popularity as people realized that a key benefit of these products was the downside protection.

As premium continued to flow into these products, members of the securities world began to take notice. In August of 2005, the NASD released their notice to members 05-50. This notice informed broker/dealers that they had a duty to supervise their representatives selling indexed annuities and in turn, the broker/dealers instructed their representatives to place their indexed annuity business through them. But what about the insurance agent selling these indexed annuities? Notice to members 05-50 would have no impact on them.

As more and more money continued to flow into these products, the SEC decided that these products should become registered and only sold by a registered representative through a broker/dealer. On December 17, 2008, the SEC board approved by a 4-1 vote, to adopt Rule 151A which states that indexed annuities are to be sold as a securities product starting January 12, 2011. If this does take effect, then only registered reps will be allowed to sell these products and their broker/dealer will need to have a selling agreement in place with the insurance company.

Will 151A ever make it to January 12, 2011?

If this were the end of this story, beginning on January 12, 2011, a person wanting to purchase an indexed annuity would have to go through a registered representative and purchase their indexed annuity after trying to read and understand a prospectus.

The good news is that the story doesn't end here. Many people feel that the SEC has overstepped its bounds in trying to regulate these products. On Friday, January 16, the Coalition for Indexed Annuities filed suit in the DC District Court of Appeals apposing SEC rule 151A. The suit indicates that Securities laws explicitly state annuities are to be regulated by the states, not the SEC. The suit also believes that 151A conflicts with Congress's intent and with two Supreme Court decisions. This will ultimately be determined by the courts. But the battle has just started. So, in the meantime, what is an agent to do?

Business as usual

If this rule does go into effect, it will begin on January 12, 2011. Until that time, any licensed insurance agent will be able to continue to write indexed annuities. There is a big window of opportunity right now. Many people are currently looking for alternatives to low savings and CD rates while not subjecting their monies to the risks that have been so prevalent with the stock market. These indexed annuities have saved policy holders many sleepless nights over the last year. The peace of mind knowing that their money has not decreased by up to 50 percent has enabled people not to panic. Those that have been in the market have been far less fortunate.

What if 151A does go into effect?

If 151A is implemented as proposed starting in January of 2011, then the agent will have to make some big decisions. The first decision will be whether to become securities licensed or not. There will be positives and negatives associated with this decision.

On the positive side, if an agent does get his securities license, he will be able to offer a much larger selection of investment options to his clients. Depending on the type of license he gets, he will have the ability to offer stocks, bonds, mutual funds, unit investment trusts, variable annuities, options, and other types of securities. For the more sophisticated investor, this representative will have a better chance to handle about every type of situation that arises with an appropriate recommendation.

So what are the negatives associated with getting your securities license? One problem is many agents do not want to take on this added responsibility. Not only will they be held accountable for understanding all the ins and outs of these options, they will also have minimum production requirements to satisfy their broker/dealer. For agents who are working only referrals or their current book of business, there will be added pressure to produce at a level that is satisfactory to the broker/dealer. Many broker/dealers will terminate representatives if they do not satisfy that minimum production.

There are also costs involved. Not only will the agent have to pay to become securities licensed, they will also have other expenses associated with being securities licensed. The broker/dealer will require E&O coverage that will need to be approved by the broker/dealer. They will also have to register in the states where they want to do business which is another yearly expense. New letterhead, stationary and business cards will also be required that will need approval of the broker/dealer. These costs will add up to thousands of dollars each year.

And don't forget, most broker/dealers will take a cut of the commission. Agents will see their income most likely will go down even if they write the same amount of business. Becoming securities licensed will not be a cheap endeavor, but is an option.

What if the agent doesn't become securities licensed?

If an agent weighs the options and decides not to become securities licensed, he/she will still have a large selection of traditional fixed annuity and life products to work with. Many carriers are looking at ways to improve their offerings of fixed products. One of the more exciting options now available on these products is income riders. These riders guarantee a person won't outlive their income while not requiring annuitization.

We are also seeing exciting products being offered with a combination of benefits. Whether it is a combination of life and long term care benefits or annuity and long term care, these products are providing several different benefits for the policy holder. If 151A does take effect on January 12, 2011, many insurance companies will leave the indexed annuity marketplace. These carries will need to offer competitive fixed annuity alternatives. This could ultimately benefit the end consumer with different products being created. Other carriers will try to work through the broker/dealer system and hope they will capture some market share of the representative's business.

As this suit unfolds and the courts determine ultimately who can and can't offer indexed annuities, the thing to keep in mind is that insurance companies have been around for hundreds of years and they will continue to offer products that benefit their policy holders. Plenty of annuities were sold before 1995 due to their benefits such as guarantees of principal, tax-deferral and choices of income options. The insurance agent will still have these benefits to offer conservative clients whose main goals are safety and guarantees.

On January 12, 2011, the world will not come to an end if 151A isn't overturned. It will just be a new chapter in a very long book.

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Retirement Income Laddering

by Jerry Golden

Jerome S. Golden is President of the Income Management Strategies Division of MassMutual. He can be reached at jgolden@massmutual.com.

Given how much retirees crave certainty and security, one would think that income annuities would be a key component in most retirement portfolios.

But historically, the popularity of income annuities has been tempered by concerns about loss of liquidity and control, and the belief that retirees can do better living off of interest and dividends from stocks and bonds.

However, a new strategy that addresses those concerns may enable retirees to embrace income annuities more readily. Retirement annuity laddering is the funding of multiple premiums into a single contract through incremental purchases of annuity income benefits with assets transferred from mutual fund model portfolios. The strategy allows customers to purchase income annuities in manageable increments, thereby guaranteeing income but doing so in a way that provides them with continued access to a portion of their savings.

By adding an income annuity to a traditional retirement portfolio of stocks, bonds and cash, clients get the security of a guaranteed income, think of it in some ways like a personal pension, of sorts, without sacrificing the wealth-producing potential of market-based investments.

In fact, a recent historical study conducted by the Income Management Strategies Division of Massachusetts Mutual Life Insurance Company (MassMutual) showed that a retirement portfolio that included an income annuity out-performed an investment-only portfolio regardless of market conditions.

The historical study was based on a series of Monte Carlo simulations testing four retirement strategies in 181 time periods beginning in 1965. The study found that a strategy based exclusively on stocks and bonds failed to meet the hypothetical client's income goal for a 27-year period in 25 percent of the scenarios. However, by adding an income annuity component, the hypothetical client met his income goal in 100 percent of the scenarios.

The study also found that a portfolio that included an income annuity matched the client's income goal in every case and, on average, produced more than five times the original deposit.

Implementing retirement annuity laddering is becoming easier, as new solutions are introduced to the marketplace that enable clients to roll over all of their 401(k) and IRA savings into a single account that can apportion their retirement portfolio among stocks, bonds, cash and an income annuity while receiving one monthly income check and one monthly statement.

Such a program also can provide agents with sophisticated tools and calculators to help them determine the best mix of stocks, bonds, cash and annuities to address each client's specific financial situation. And the process of revisiting the strategy on a regular basis creates a dynamic that contributes to a lifetime advisory relationship.

This approach also enables a client to make the growth portion of their portfolio more productive by potentially investing that portion more aggressively. The security of guaranteed income from the income annuity can free clients to pursue their income growth objectives with more confidence.

Retirement annuity laddering also leaves customers with the liquidity to deal with an unforeseen expense, such as a healthcare crisis and the control to confidently draw down their market-based investments when they need additional income for any reason. The beauty of this approach is that the client can make these emergency withdrawals without any affect on their guaranteed income stream from the annuity.

If there was ever any doubt, the current stock market crisis highlights the danger of putting all your retirement eggs in one basket. But even in a healthy market, it is wise for agents to include a guaranteed income component in client portfolios to help them weather the inevitable crises and unexpected circumstances that can upset even the best-laid retirement plans.

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Give retirees a raise

by John Rafferty

John Rafferty is vice president of annuity marketing for American General Life Companies. He can be reached at john_rafferty@aigag.com

It's time for some good news in the insurance and financial industry, and here it is: According to LIMRA International, sales of income annuities grew 20 percent through the third quarter of 2008 as compared to the same period a year earlier.hile this growth trend is promising, there are three reasons why producers need to more aggressively and creatively promote income annuities in particular and annuitization in general: It's good for consumers, it's good for advisors and it's good for the health of the insurance industry.

Why withdrawal strategies are wanting

The ability to provide a stable guaranteed lifetime income source remains the primary selling point of immediate annuities, but it's only half the story. The best kept secret in the retirement business is the substantial incremental cash flow that immediate annuities can provide relative to traditional income methods, including: withdrawals from securities portfolios, dividends from equities and interest payments from bonds or certificates of deposit.

Conventional wisdom among practitioners and academics alike indicates that a four percent withdrawal, adjusted annually for an inflation assumption of three percent, is the maximum amount one can withdraw from a portfolio of assets and still have a reasonable expectation (90 percent confidence) that it will last through a 30-plus year retirement. For instance, in year one a $100,000 portfolio would produce $4,000 in withdrawals or $333 per month; in year two, $4,120 or $343 per month, and so on.

Said another way, if your retirement income will be four percent of what you've saved, you'll need to save 25 times the income you want from withdrawals. Want $80,000 per year? Plan on having $2 million amassed at retirement. That's a tall order for even six-figure wage earners to fulfill.

Put some mortality in your lifetime income

By contrast, an immediate annuity guaranteeing income for two 65-year-old spouses for life, or 20 years, whichever is longer, will generate an equivalent cash flow of about seven percent. Relative to the withdrawal scenario, that's a 75 percent increase in cash flow.

In exchange for that "raise," the retirees will need to sacrifice something; in this case, access to the asset that the withdrawal scenario provides. In a $100,000-portfolio scenario, if they die before 20 years pass, the income stream will cease at the end of the 20th year. Regardless, the retirees are guaranteed that the minimum cumulative income stream will be approximately $140,000, mitigating any concerns that they may "lose" the mortality bet and get back less than they invested.

Of course, the four-percent withdrawal is inflation adjusted, while the single premium income annuity (SPIA) in this example is not. It is also possible that with four percent withdrawals there will be principle remaining after the death of both spouses and with the annuity all the principle will have been used. While this may seem an apples to oranges comparison, consider this: At three percent annual increase, the four-percent withdrawal requires 19 years, arguably the majority of a retirement span, to grow to the annual cash flow generated by the immediate annuity and whether or not principle remains is dependent upon market conditions.

Part of the solution, particularly for the "needs" in life

No reasonable consumer or prudent advisor would put 100 percent of retirement wealth into an immediate annuity. Yet as retirees look for ways to create or stretch income streams from their finite wealth, immediate annuities can improve the overall cash flow and ultimately reduce the burden on withdrawal strategies to enhance sustainable outcomes. Where a four to five percent (or higher) withdrawal may have been in place prior to the use of an income annuity, the withdrawal percentage can be reduced by adding the annuity to the portfolio. Reducing the withdrawal burden may give the assets remaining in accumulation a greater growth opportunity.

Reducing the burden on withdrawals is an important point. If you're a car buff or know of one, it's not that different from having a reliable car to shoulder the regular commuting duties, while reserving the classic car for weekends and shows, and maybe even seeing it appreciate in value if the market is favorable. The commuter car is for needs, the show car for wants. Both play an important role, not unlike the pairing of an income annuity and a withdrawal strategy.

Results in retirement result in referrals

Consider this scenario: After reviewing a retiree couple's portfolio and their objectives, their advisor recommends a life annuity with 20 year period certain. While the direct benefit to the client is an improved situation in retirement, and to the advisor immediate compensation, there are other positive consequences that often arise.

The advisor who's done good work for the client knows this much: No matter what happens over the next 20 years, he or she is the advisor of record associated with the clients' monthly check, whether the checks continue to the couple, or continue to the couple's adult heirs. That's like having 240 monthly advertisements for the advisor's service and foresight in implementing a prudent income plan. Rest assured, happy retirees, and their adult children, will share their experiences with others. As we so often counsel our clients to make their money work for them, producers need to make their money-making solutions work for them as well.

Back to Basics: Diversification

Income annuities are also important for the long term vibrancy of the insurance industry in helping us diversify the income story we collectively promote. What was essentially a 25 year bull market that ended in 2007 conditioned many, consumers, carriers and producers alike, to believe that investment centric approaches could provide the bulk of the income solutions retirees would need. Yet in the wake of the credit collapse, many are seeing that it's wise to annuitize.

We need to make mortality based solutions more compelling, not only through product enhancements, but also by recasting the basic value proposition in a new light. The need to focus on how annuities can meet lifetime income needs has to shift to a focus on how they can provide more lifetime income than other products and methods, and the consumption benefits that extra income provides. For example, if owning an income annuity can mean the difference between being able to afford a cruise every year or a fancy restaurant meal once a month, doesn't that make it more compelling as a solution for providing the means for really enjoying life?

As an industry we need to refocus on promoting the time honored concept of mortality based risk pooling. It's an efficient means of creating lifetime income streams by getting the most from the least, and a core holding of a diversified income portfolio. The insurance industry owns the exclusive franchise to mortality based income solutions. Let's use it.

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Retirement: what's the hold up? 54 percent will delay retirement; 40-somethings most impacted by economic crisis

by Herbert K. Daroff, J.D., CFP

Herb Daroff is associated with Baystate Financial Services in Boston. He is a contributing editor for LIFE&Health Advisor. Daroff can be reached at hdaroff@baystatefinancialplanning.com.

American workers, as many as 54 percent of them, will delay their retirement by at least one year due to the current economic situation, with 24 percent saying they will need to work more than five years.

This was reported by Sun Life Financial in the latest edition of its Unretirement Index. The Index, released multiple times a year, gauges how economic, financial, and societal forces affect working Americans, and forecasts their future retirement decisions that will impact individuals, the government, employers and the broader economy.

The Unretirement Index most recently polled American workers in December, and previously polled them in August 2008. As a result, the latest findings are the first to measure how American attitudes and expectations of retirement have changed since the economic crisis last fall. Ongoing research showed the current economic climate has adversely impacted the American workforce, and while the number of Americans who expect to work at least 20 hours a week after age 67 is largely unchanged, their reasons for continuing to work have dramatically changed. Over the last 90 days, the most popular reason cited by American workers for why they would continue to work past the traditional retirement age of 67 shifted from "to stay mentally engaged" to "earn enough money to live well." While staying mentally engaged fell to the second most popular reason, the number of Americans who cite they will continue working "for health care benefits" rose from the sixth primary reason to the third most common answer, with 64 percent now listing it as a reason to postpone retirement.

Unretirement is defined as working at least 20 hours per week after the age when one is eligible to receive Social Security benefits. Sun Life created this Index to learn more about the reasons why Americans are choosing to "unretire," or continue to work full- or part-time after the age of traditional retirement.

"Our newest findings illustrate just how severely the current crisis has affected Americans" personal finances and their reasons for continuing to work longer than they anticipated," said Jon Boscia, President of Sun Life Financial. "While finances remain one of many factors influencing retirement decisions, the Unretirement Index is a barometer of measuring how outside influences like market behavior truly change personal behavior. It explains how and why retirement is changing in the U.S."

Forty-something Americans deeply impacted by recession

The Index also reports the current economic environment has most deeply impacted the retirement mindset of Americans aged 40 to 49. Seventy-seven percent of them who plan to work past traditional retirement are doing so to receive health care benefits. This represents a 16 percent spike in just the last 90 days, far more than any other age group. Forty-something Americans also led all demographics in expecting to work five years longer than planned (28 percent), saving or investing more in the last three months (40 percent), and continuing to work after 67 because of earning enough money to live well (87 percent).

How are Americans responding?

Sixty seven percent of all Americans are now reducing their spending and over half (55 percent) are reducing their debt while far fewer Americans are trying to find a better paying job (22 percent). Of those trying to reduce spending:

Americans not withdrawing retirement saving

Ninety percent of Americans have not had to withdraw any of their retirement savings from long term investment products like IRAs, 401(k)s and annuities.

Despite this positive note, confidence that government benefit programs like Social Security and Medicare will remain solvent continued falling, especially among workers in their 30s and 40s. Seventy percent of workers in their 30s and 66 percent in their 40s do not believe Social Security will be available when they are 67.

UNRETIREMENT INDEX NUMBER

On a scale of 0-100, the Index dropped from its initial overall score of 46 to 44, showing Americans are more pessimistic about their retirement prospects. It also means Americans are more likely to continue working at least 20 hours a week after age 67. The Index is made up of several subindices that address different areas that impact retirement decisions including the economy, personal finance, health, government benefits, and employee benefits. The greatest contributor to the Index drop came from the personal finance subindex, which decreased by seven points due to declines in retirement savings and investments, plus a significant drop in personal income growth.

The Index shift probably would have been greater if not for the decline in national gasoline prices which greatly impacted the way that American workers feel about the overall economy. When given a list of several factors that impact the current economic environment, from food prices to housing values to employment opportunities, the cost of gas went from the "worst aspect of the economy" in the eyes of Americans to "the best aspect of the economy."

The overall index is a composite score based on the performance of five issue-specific indices, including: the "economic index" (score = 33), the"personal finance index" (score = 41), the "health index" (score = 67), the "government benefits index" (score = 40), and the "employer benefits" index(score = 38).

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Post retirement allocation : Three buckets are better than one

by Howard Hook, CFP, CPA

Howard Hook, CFP, CPA, is a financial planner with Access Wealth Planning in Roseland and Princeton, N.J. He can be reached at hhook@awplan.com.

A concept that some advisors, as well as most investors, have a difficult time grasping is the need for an allocation of no less than 50 percent of their portfolio to stocks after retirement. After all, current wisdom dictates that at this stage one's portfolio should be shifted heavily towards fixed income such as bonds and cash and away from more risky assets like stocks.

This belief is so profound that a common rule of thumb repeated everywhere is to subtract your age from 100 and that should be your allocation to equities. Therefore, a 65-year-old retiree should have allocated 35 percent of his portfolio to stocks and 65 percent to bonds and cash.

However, this belief is born out of a misunderstanding of the real risk that retirees face in retirement. Most retirees, especially in light of today's economic environment, will point to the loss of principle as the greatest threat to their ability to maintain their lifestyle in retirement. But loss of principle is not the greatest risk. The real threat is withdrawing money from a portfolio too heavily weighted towards fixed income, those designed to produce income and little or no growth, over a time period that is ever increasing as we live longer. That sounds like a mouthful and it is. Simply put, the appropriate portfolio is designed to produce distributions (not income) that will, at a minimum, keep pace with inflation over a long period of time.

Meanwhile, a portfolio with too much of a weighting towards fixed income has little or no chance of keeping pace with inflation over time.

Historically, long-term bonds have delivered approximately five percent annual return before taxes.

For the retiree in the 15 percent tax bracket this would equate to a 4.25 percent after tax return. Inflation, as measured by the Bureau of Labor Statistics, has averaged approximately 4.2 percent for the past 30 years ending in 2007. This means that the income produced on average by a long-term bond over the past 30 years barely kept pace with the rising costs of goods over the same time period. Since the return on bonds is generated entirely on the income the bonds pay, the retiree would eventually have to begin to sell off principle to meet his increasing distribution needs.

Owning stocks on the other hand is a much better idea. Stocks return on average 11 percent before taxes and for the same investor in the 15 percent tax bracket we will assume a 9.35 percent after tax return. Now, having to distribute money from a portfolio growing after tax at an average annual rate of 9.35 percent per year will surely, at a minimum, keep pace with inflation growing at 4.2 percent.

However, there is a price to be paid for choosing stocks over bonds, one that ultimately many people can't get past. In order to have the opportunity to grow the portfolio at a rate that will outpace inflation, the retiree needs to be able to handle the fact that there will be periods of time when this does not occur, and even worse, there may be periods of time where the portfolio decreases. Stocks do and will decline in value. Owning a lot of well diversified stocks, however, will result in this decline being temporary.

The key is to have some other pot of money to draw from when the stocks are declining. Allowing the stock portion of the portfolio to grow without having to draw from it gives the stock portion the greatest opportunity to rebound and perform according to historical averages.

Using what I will call a three bucket approach, the first bucket should be filled with two to three years worth of cash needs. This is the bucket the retiree will draw from each month and should be comprised of very short-term save investments such as Treasury Bills or certificates of deposit.

The second bucket should contain a wide variety of fixed income investments including short, intermediate, and long-term bonds, and may even include some high yield bonds and international bonds depending upon the retiree's risk tolerance. The purpose of this bucket is to ultimately replenish the first bucket and to dampen the volatility of the overall portfolio.

Finally the third bucket should be made up of the equity investments in the portfolio. These investments should be well diversified equities across a wide spectrum of asset classes. I think we all know by now that owning 10 bank stocks is not considered being well diversified in equities. The third bucket will provide the growth needed to outpace inflation over the long period of time the investor will likely be retired.

Of course, I am not suggesting actually segregating a client's assets into three separate accounts, let alone three buckets, but rather explaining the concept of the three buckets of the portfolio to clients. This will help them deal with the inevitable temporary decline in the third bucket. Explaining to them that the first bucket holds enough of their cash needs to weather the temporary decline without having to touch those equity assets should give retirees some comfort to get them through the decline.

Putting an investment portfolio together where the stock allocation is designed to outpace inflation and provide growth in the portfolio, while the fixed income side of the portfolio is designed to provide current income when the stock market is down, gives retirees the best chance to meet the goal of not outliving their money.

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151A - What impact could it have?

by Mike Janky

Mike Janky, CLU, ChFC, CFS, CAS, RHU, CASL, IAR, is president of Forward Strategies, an annuity marketing organization located in Tucson, Ariz. He can be reached at mjanky@fsib2000.com.

On June 25 of this year the SEC released a proposed ruling that rocked the insurance world. This proposal if approved would extend SEC jurisdiction to include fixed annuities as a securities product. By rule, an agent who wants to continue selling these products would have to become securities licensed and write this business through a broker/dealer. How will this rule, if approved, impact the industry, agents and ultimately the consumer?

For the most part, the primary carriers that issue these products are adamantly against 151A. Their primary source of distribution for these products is the insurance licensed agent. Should 151A be approved as is, the insurance company will then have to work through broker/dealers and the registered representative. This will dramatically decrease their volume of business as some agents will choose not to become securities licensed. For those that do become securities licensed, the product will now need to be sold by prospectus and that usually means more confusion for the both the client and the registered representative.

From the agent's point of view, the majority of licensed agents are strongly apposed to the rule. Many of the agents that sell these products want to focus on insurance and not investments. In my opinion, these indexed annuities are, without a doubt, insurance products and not securities. If the agent now has to become securities licensed, he or she will now have the added expenses of becoming registered with a broker/dealer. That includes the cost and time to take the securities exam, additional E&O insurance, administrative fees and other charges that a typically broker/dealer assesses throughout the year. These costs can add up to thousands and thousands of dollars of additional expenses.

To make matters worse for the producer, now the broker/dealer will be taking part of agent's commission. Most broker/dealers have a payout schedule of between 70 and 90 percent of gross dealer concessions. That means to the writing agent that his or her compensation would be reduced 10 to 30 percent for doing the same work.

Many broker/dealers also require that their registered representative produce a minimum amount of gross dealer concessions in order to keep their registration. It's not too difficult to understand why the agent feels so strongly about keeping these indexed annuities under the watch of the state insurance departments and not the SEC.

The ultimate loser if proposal 151A is approved will be the end consumer.

The ultimate loser if proposal 151A is approved will be the end consumer. These products have provided the policy holder a guarantee that no matter what happens in any of the indexes to which they are linked; they will have 100 percent of their principal plus any gains that have been credited in previous years. With the market hemorrhaging at every new press release, this guarantee can make the difference between sleeping at night knowing that your money is safe or worrying about turning on the television and seeing what new bad news is driving the market down along with your account balance.

The main selling points of indexed annuities since their introduction in 1995 has been safety of principal with the chance to receive higher returns than traditional safe alternatives like CDs, money markets and savings accounts. The impact of 151A would appear to have a much more negative impact on the policyholder that any positive outcomes. You will have fewer companies designing these products and fewer agents talking about them to the client. Lack of competition will produce an inferior product. So why is the SEC trying to get control of these products?

The SEC has indicated that it feels these products, if regulated by themselves, would be more beneficial to the policyholder. They cite long surrender charges and high commissions as part of their motivation to take control. Most state insurance departments have adopted rules in order to limit the length of surrender charges an indexed annuity can have. True, there are some contracts that have long surrender charges, but annuities have typically required a long term commitment from both the policyholder and the insurance company. In order for a person to benefit from tax deferral, the longer they keep their money growing in an annuity, the more they actually benefit.

Most of the annuity contracts offer 10 percent free withdrawals, full death benefit and some have a long term care benefit as well so some of the money is accessible right away. There are also products that have short surrender lengths that may be more appropriate, depending on what the client is trying to accomplish.

As far as the commissions go, 100 percent of a client's money that goes into a contract stays in the contract. Their value is not reduced by the agent commission. Compare this to mutual funds or variable annuities which have fees and charges that are deducted from the client's value.

These arguments don't hold a lot of water as far as I'm concerned. So what could be the true motivation of the SEC?

The indexed annuity business has grown to a $25+ billion a year premium business. This could become a huge source of revenue for the securities industry should 151A be enacted.

So for now, all eyes are on the SEC. Unfortunately, the SEC elected not to extend the comment period regarding this proposal. The comment period ended on September 10. With as big an impact that this ruling could have, it would have been nice to see the SEC extend this comment period to listen to all sides involved. Now the SEC is suppose to review the comments and decide whether to pass the proposal as is, modify it, or reject it. They typically take between 30 and 60 days to make decisions.

If the SEC does enact the proposal, the game won't end just yet. Many insurance companies have indicated that they are prepared to take this all the way to the Supreme Court. This might not work out well for the SEC. In three different documented court cases regarding these indexed annuities, the courts have ruled that they are not securities products and fall under the jurisdiction of the state insurance departments. Based on these rulings, the SEC may find that it has overstepped its' bounds and be directed to focus on actual securities problems.

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Retirement Income: All About Accumulation

by Laurence Greenberg

Laurence P. Greenberg is President and CEO of Jefferson National. He can be reached at www.jeffnat.com or at 866-949-3528.

Part I of a two-part feature
Read any industry publication and the buzz is about "retirement income" solutions. The choices include variable annuities offering a range of different living benefits, target date mutual funds and payout mutual funds, all designed to generate income during retirement years. But with all the hype, here's a statistic that's clearly been overlooked: The median boomer is 51 years old. That's 14 years, or more, away from retirement. Which means accumulation is still a big issue for more than half of the 77 million boomers, as well as the younger generations following them. And in this era of do-it-yourself planning and a failing retirement safety net, experts agree most Americans need to save more.

Needless to say, accumulation is the foundation of retirement income.

Needless to say, accumulation is the foundation of retirement income. And to maximize long-term savings, few things beat the power of tax-deferral. When you stockpile your investments for years or decades, compounding growth without stripping away 15 percent to 35 percent in taxes each year during the accumulation period, you could have substantially more by the time you reach your retirement.

A new study, co-authored by University of Chicago Professor Ira Weiss, Ph.D. and Jefferson National's Matthew Grove, set out to prove this point. You may be surprised to learn that tax-deferral can quickly outperform a taxable investment, even when capital gains are at an all time low. It may surprise you even more to learn how little time it can take for a tax-deferred account to break even with, and then outperform, a taxable account. The key is using a low-cost, no-load tax-deferred investment platform.

Study: Tax-deferral can supercharge accumulation for more retirement income

So how can you and your clients supercharge accumulation to help ensure a secure retirement? The basic building block of retirement savings is to max out your tax-deferred accounts such as 401(k)s, IRAs and other defined contribution plans.

But then what? Tax-deferred variable annuities are an option. Yet most advisors and their clients have been cautious about traditional VAs with their high asset-based fees, limited fund selection and complicated insurance guarantees. What about a new type of VA, designed to offer all the power of tax-deferral, without all the cost, and with substantially more investment options? A VA that replaces asset-based insurance fees with a simple flat-insurance fee of just $20 per month?

To find the answer, our study, Increasing Retirement Income Through the Power of Tax Deferral, posed several important questions, including:

  1. All things considered, do tax-deferred vehicles offer an appreciable advantage over accumulating long term in a taxable portfolio?
  2. Comparing various types of portfolios and risk profiles, how long will it take a tax-deferred account to "break even" with a taxable account?
  3. How do factors such as asset class, asset location, active trading and account size impact long-term accumulation?
  4. Do the asset-based fees of traditional variable annuities have a long-term affect on accumulation potential? Replace those fees with a flat-insurance fee, and how much can performance improve?

By the numbers: It doesn't take long for tax-deferral to work

How does the accumulation power of the tax-deferred, flat-fee VA stack up versus the taxable account? Our research shows it can help your client save more, generate more retirement income and leave a larger legacy:


And what about the flat-fee VA versus a traditional variable annuity? The asset-based fees of a traditional variable annuity, averaging 1.35 percent annually, can cause the break-even period to skyrocket to 23, 31, and 37 years for conservative, moderate and aggressive investors respectively, virtually eroding any accumulation benefits of tax-deferral.

In addition to the flat-fee advantage, this new breed of VA works harder than the typical VA by offering a broad selection of investment options – virtually a tax-deferred investment platform with 54 times more funds than the typical VA. By eliminating commissions, surrender fees, and complex insurance features, flat-fee VAs create value dramatically faster than traditional variable annuities.

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