Annuities are insurance against outliving your money or in other words insuring against longevity risk. Annuities are defined in one of the following ways: 1) a fixed sum of money paid to someone each year, typically for the rest of their life or 2) a form of insurance or investment entitling the investor to a series of annual sums. From this simple purpose, annuities have evolved into some highly complex products.
Annuities are typically not popular with most financial planners and financial writers for mostly good reasons. The bottom line reason is that most annuities really don’t have very much to do with their original meaning and would certainly not be recognizable by those who designed the very first annuities.
As America ages, there is going to be a growing need, which is being discussed in the financial press and by many leaders in the financial planning world for simple lifetime annuities, in other words annuities that people cannot outlive. One of the biggest concerns for retirees and rightfully so, is that they will outlive their retirement savings. As most Americans don’t have a defined benefit pension plan, they have no guaranteed monthly income except for that provided by Social Security. There is a huge opportunity for insurance companies to provide a valuable product will benefit consumers. The question is whether insurance companies and insurance agents will sell insurance products that provide more benefits to consumers to themselves.
Keep it simple stupid is a mantra we’re all familiar with and it seems as if some annuity companies are understanding that KISS is a good business strategy and starting to distribute annuities with lower commission rates and fees.
The issue that is being forced by the DOL Fiduciary Rule is whether insurance companies will start to introduce annuities that are more consumer friendly. The gap can be explained in asking the question of why can variable annuities have a short surrender period and then allow 100% surrender while indexed annuities can have longer surrender charge periods and then limit withdrawals to 10%?
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