Annuities—those often misunderstood insurance products—are getting a makeover of sorts. With traditional pension plans disappearing, life expectancies increasing, and uncertainty about Social Security and investment returns on the rise, retirees are seeking ways to lock in a lifetime stream of income. Annuities, which can create guaranteed, pensionlike payouts, are one way to go about it.
But the industry has long suffered an image problem. "If you brought up the word annuity at a cocktail party, you'd be standing alone pretty quickly," says Bryan Place of Place Financial Advisers in Manlius, N.Y. "Say that word, and people think high commissions, high fees, brokers trying to sell them to widows who don't need them. But reality differs from perception." Other knocks against annuities include inflexible contracts and a bewildering number of bells and whistles.
Cut out the middleman
Advisers like Place, as well as some of the big financial firms, are working to demystify these sometimes complex tools with stripped-down products, easily digestible research, Web-based calculators, and in at least one case, online purchase options. In December, Fidelity began allowing customers to sidestep the middleman and open a tax-deferred variable annuity online. In addition, insurance companies including Hartford, Genworth, MetLife, and Prudential Financial are now offering annuities designed for 401(k) plans. So far, several dozen employers have added annuities to their menu of investment choices, giving workers the option to direct all or part of their contributions into annuities.
Fidelity says its Personal Retirement Annuity is suitable for online sales because it's devoid of complicated add-ons. "What we've done is try to simplify the product," says Joan Bloom, senior vice president of Fidelity Investments Life Insurance. "Through customer research, we found that customers really didn't understand what they were buying, so we stripped our products down to offer the most basic features at a low cost."
Using input from focus groups, Fidelity has also revamped its online research materials to include calculators, worksheets, and two-minute videos explaining the ins and outs of annuities.
Strive for simplicity
Perhaps more evidence that annuities need unscrambling: Annuities for Dummies hit the shelves in January (to be fair, The Complete Idiot's Guide to Buying Insurance and Annuities has been out more than a decade). "The industry is trying to strike a balance between making these products simple enough to understand, yet hardy enough to deal with the real risks in the marketplace," says John Diehl, director of Hartford's Retirement Solutions Group, which uses research from MIT's AgeLab to create more understandable annuity marketing materials.
Some confusion stems from the variety of annuities on the market. Annuities can be immediate, which means payments begin right away, or deferred, meaning payments (and taxes) are postponed. They can also be fixed, with a set payment amount, or variable, which means payments depend on the performance of an investment.
Riders, such as death benefits, guaranteed rates of return, and long-term-care benefits, can complicate variable annuities. Those extras often come at a steep premium, so it pays to eyeball variable annuities closely, says Rudy Aguilera, founder of Helios, an investment advisory firm in Orlando. "Transparency has never been one of the industry's strong suits," he says.
Do your research
But don't assume all annuities are overly complicated, says John Ameriks, head of Vanguard's Investment Counseling and Research Group. "Immediate annuities are straightforward," he says. "The deal is this: You give us a lump sum; we give you payments for as long as you live. It's not a lot more complicated than that."
Like Fidelity, Vanguard offers stripped-down annuities that minimize fees. Customers can fill out applications online, although they must print, sign, and mail the forms. However, few people go this route, says John Heywood, principal of Vanguard's retail investor group: "Most people want to talk first."
Talk or no talk, it pays to research annuities, whether they're simple or complex. "For retirement, you're probably going to need a diverse portfolio of products," Diehl says. "So you need to consider how an annuity would complement that portfolio."