Greater Need for Consumer Education on Annuities, I.I.I. Survey Finds -- Consumers Take to the Web to Learn the Basics

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New York: 212-346-5555; media@iii.org
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NEW YORK, July 20 - Even though sales of individual annuities doubled from 1996 to 2002, many people don't really understand what these products are and how they can assist in retirement planning.

A recent survey by the Insurance Information Institute (I.I.I.) found that 40 percent of women and 31 percent of men couldn't identify what annuities are.

The survey also found that knowledge of annuities correlates with the income and education of a household. People with a college degree had a greater understanding of the product, compared with those with less education.

"There is a great need and demand for consumer education on annuities and retirement planning," said Jeanne M. Salvatore, vice president for consumer affairs at I.I.I.
With the aging of nearly 76 million baby boomers, retirement is a topic of intense interest, says Salvatore. In fact, from 2011 to 2029, the size of the over-65 population in this country will double as the "boomers" begin to enter retirement.

The desire to learn more about annuities also is reflected in the I.I.I.'s Web traffic, said John Spagnuolo, director of new media for I.I.I. "One of the most frequently asked questions that leads people to our Web site is "What is an annuity?"

How much has the annuities market grown?

Sales of individual annuities increased from $110.8 billion in 1996 to $223.1 billion in 2002 -- a 101 percent increase, according to LIMRA International. And the different types of variable annuity contracts being offered has increased over 1,000 percent (from 68 to 557) from 1992 to 2002, according to the National Association of Variable Annuities (NAVA).
Who sells annuities?

Annuities are a financial services product issued by insurance companies. While banks and stock brokerage firms frequently market annuities and other insurance products, only licensed insurance agents can legally sell annuities. To sell variable annuities, agents must also have a license to sell securities.

Why do consumers consider purchasing an annuity?

With life expectancy increasing, it is common for retirement to last 20 years or more. This raises the concern that many retirees may outlive their assets. Consider the following:

• Government-created retirement plans limit contributions
  Plans such as a 401(k), 403(b) or Keogh are an important part of planning for retirement. Unlike annuities, contributions to these plans are limited.
• Social security and pensions may not be enough
  The average Social Security check was $876 per month in 2002, according to the Social Security Administration. This may not be enough for most retirees. According to the Employee Benefit Research Institute (EBRI), traditional "defined benefit" pension plans are becoming rare, as more Americans are now responsible for funding their own retirement. In fact, private employer-sponsored "defined benefit" pension plans declined from 100,000 in 1975 to less than 31,000 in 2003.
• Taxes can eat away at savings
  Because many sources of retirement such as Social Security, IRAs and interest earned on CDs and savings accounts are taxable, many retirees may end up with a lot less after-tax income than they had been expecting. Many financial planners suggest annuities as a way to supplement retirement savings. Annuities provide a number of income choices, including a guaranteed income that can never be outlived. With life expectancy increasing, this option is very appealing to many consumers.

What should consumers do if they are thinking about purchasing an annuity?

Learn the basics

There are two types of annuities to consider - deferred and immediate.

A deferred annuity is a financial contract with two phases: an "accumulation phase" during which the invested funds grow on a tax-deferred basis and a "withdrawal phase" during which income is taken from the contract. It is a long-term personal retirement account that allows consumers to save and invest on a tax-deferred basis. Since taxes are not paid until the money is withdrawn, the value of the annuity can really accumulate over time.
An immediate annuity is a financial contract that provides an immediate income stream usually for people near retirement who are looking for a source of income that they won't outlive.

In many ways, annuities are like private pension plans. In exchange for paying an insurance company a sum of money, the insurer will provide a lifetime stream of income.
"With so many features in the new annuity contracts, it is important to seek the advice of a knowledgeable professional," says Michael David Schulman, CPA/PFS and member of the American Institute of Certified Public Accountants (AICPA.). "An investor's age, health, their other investments and risk tolerance should all be considered before purchasing an annuity."

Find a knowledgeable life insurance agent.

Annuities are a sophisticated retirement planning tool. People interested in purchasing an annuity should find a life insurance agent who is licensed to sell annuities in their state and who has a solid reputation for customer service. Many financial planners, Certified Public Accountants (CPAs)/ Personal Financial Specialists (PFS) and stockbrokers also are licensed insurance agents. A good agent should:

• Understand a consumer's short- and long-range financial goals
• Answer all questions clearly
• Suggest annuities that meet a consumer's budget, financial goals and willingness to assume investment risk
• Explain the costs and fees associated with annuities.

More information on annuities can be found on the I.I.I.'s Web site at www.iii.org. The site also contains a "Find a Company" tool that provides life insurance companies by state in random order. Consumers may want to access life insurance Web sites to learn more about the various types of annuities offered.

I.I.I.

The I.I.I. is a non-profit, communications organization supported by the property/casualty insurance industry.