BeFi Web Seminar for February 28, 2007
The U.S. Individual Annuity Market by Matthew Drinkwater, Ph.D., FLMI, PCS
Assistant Director, Retirement Research
LIMRA International

Matthew Drinkwater, Ph.D., FLMI, PCS
Assistant Director, Retirement Research
LIMRA International
Behavioral Finance Forum Webinar
February 28, 2007

Annuities 101
What is an
?
Contract between an insurance company and an owner wherein the company pays a guaranteed income to the owner for the rest of the annuitant’s life and/or for a specified number of years in exchange for a single payment to the company.

Annuities 101
Owner
Insurance Company
Annuitant
March April May June…

Why Is Lifetime Income Important?
Source: Human Mortality Database, University of California, Berkeley (USA), and Max Planck Institute for
Demographic Research (Germany). Available at www.mortality.org
. Mortality rates based on 1999 experience. LIMRA International tabulations.

Annuities 101
 Categories
 Individual vs. group
 Deferral length
 Deferred
 Immediate
 Product type
 Fixed
 Variable
 Tax-qualification

Annuities – The Essentials
Deferral Length
Deferred
Products
Annuitized payouts begin after deferral period
Mainly used for accumulation
Some allow multiple payments
Immediate
Products
Annuitized payouts begin immediately
Used for guaranteed income
Single payment

Annuities – The Essentials
Deferral Length
Deferred
Products
Immediate
Products
Fixed
Deferred
Variable
Deferred
Guaranteed minimum interest rate (during deferral period)
Investments performance reflects market
Not guaranteed*
*Usually

Annuities – The Essentials
Deferral Length
Deferred
Products
Immediate
Products
Fixed
Deferred
Fixed
Immediate
Variable
Deferred
Variable
Immediate
Equal payments
Payments increase or decrease based on market performance

Who Buys Annuities?
 Need guaranteed accumulation and/or income
 Age
 Fixed annuity buyer avg. age = 65
 Variable annuity buyer avg. age = 55
 Immediate annuity buyer avg. age = 70
 Higher income / assets levels
 Have personal financial advisor, insurance agent, etc.
Sources: LIMRA International, Annuitization Study: Profiles and Attitudes (2004); Deferred Annuity
Owners (in progress)

Who Sells Annuities?
 Must be licensed to sell life/annuity products in state
 To sell variable products, must also be a registered representative
 Distribution channels…
Direct Stockbrokers/wirehouses
Captive agents
Independent agents
Brokers/financial planners
Banks
Other channels

Who Sells Immediate Annuities?
Top 20 Sellers as of 3rd Quarter 2006
AEGON USA
AIG
Allstate Financial
Aviva Life
Fidelity Investments Life
Genworth Financial
IDS Life
ING
Jackson National Life
Lincoln Financial Group
Massachusetts Mutual Life
MetLife
Mutual of Omaha
Nationwide Life
New York Life
Old Mutual Financial Network
Principal Life Insurance Company
Protective Life
Thrivent Financial for Lutherans
Western Southern Group
Source: LIMRA International, U.S. Individual Annuities

What’s Selling?
Payout Annuity Sales Sluggish
Fixed immediate
3.0
3.6
4.8
4.8
5.3
5.4
5.9
Variable immediate
2.8
2.8
2.1
2.4
0.2
0.2
0.3
0.5
0.8
0.7
0.6
0.5
0.3
0.3
0.3
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: LIMRA International, U.S. Individual Annuities, Fourth Quarter 2006 (2007).

What’s Selling?
Annuitizations Are Infrequent
Annuitization rate
Annuitizations
($ bil)
Immediate annuities
2000
0.8%
$10.8
3.8
2001
0.7%
$9.2
4.3
2002
0.6%
$7.1
5.4
2003
0.8%
$11.1
5.3
2004
0.5%
$8.2
5.6
2005
0.6%
$10.1
5.7
Total Market $14.6
$13.5
$12.5
$16.4
$13.8
$15.8
Annuitization rate = Dollars annuitized divided by average deferred assets in force. Source: LIMRA
International, The 2005 Individual Annuity Market: Sales and Assets (2006).

What’s Selling?
Deferred & Variable Products Dominate
January through December, 2006
 Deferred sales = $224.2 billion
 Variable = $160.3 billion
 Fixed = $63.9 billion
 Immediate sales = $6.2 billion
 Almost all fixed
Source: LIMRA International, U.S. Individual Annuities, Fourth Quarter 2006 (2007).

What’s Selling?
Guaranteed “Living Benefits” in VAs
 Evolved from death benefits introduced in
1990s
 Guaranteed Minimum Income Benefit
 Guarantees value of base applied to payout will not fall below minimum amount
 Amounts invested in separate accounts can grow beyond guaranteed amount
 Benefit matures after 7 to 10 years
 Annuitization required to exercise benefit
 Mortality factors applied to payout may be less generous

What’s Selling?
Guaranteed “Living Benefits” in VAs
 Guaranteed Minimum Withdrawal Benefit
 Guarantees withdrawals until benefit base is exhausted, regardless of actual investment performance
 Benefit base usually equals premiums paid less withdrawals
 Usually annual maximum withdrawals of 7% of benefit base
 Benefit can be used immediately
 Annuitization not required to exercise benefit

What’s Selling?
Guaranteed “Living Benefits” in VAs
 Guaranteed Minimum Withdrawal Benefit for Life
 Guarantees withdrawals for life, regardless of actual investment performance
 Benefit base usually equals premiums paid less withdrawals
 Usually annual maximum withdrawals of 5% of benefit base
 Benefit can be used immediately
 Annuitization not required to exercise benefit

What’s Selling?
Guaranteed “Living Benefits” in VAs
New Variable Annuity Sales, 2 nd Quarter, 2006
Living
Benefit
Not
Available,
20%
Living
Benefit(s)
Available,
80%
Owner elected benefit(s),
60%
$18.9
billion
Sources: LIMRA International, U.S. Individual Annuities, Second Quarter (2006); and Variable
Annuity Guaranteed Living Benefits Election Tracking , Second Quarter 2006 (2006).

Why Aren’t More Selling?
Consumer Objections
Loss of control of assets
Inability to access money for emergencies; lack of liquidity
Untrustworthiness of co.; concerns about ethics/solvency
Fixed income won’t keep up with inflation
Missed investment opportunities
Dying too soon
Reduces value of estate for heirs
Costs and fees
Amount of income generated would be too small
Reduces total amount of assets
4
3
2
2
2
2
35%
12
11
4
Results represent categorized open-ended responses. Source: LIMRA International,
Retirement Income Preferences (2006).

Why Aren’t More Selling?
Desire for CONTROL
Converting some of your savings into guaranteed lifetime income and no longer having control of those savings
4%
1
7%
22%
Retirees
27%
2 3 4
Source: LIMRA International, Retirement Income Preferences (2006).
Average rating = 4.06
24%
5
15%
Keeping control of your savings and taking withdrawals that are not guaranteed to last for your lifetime
6

Why Aren’t More Selling?
Salesperson Objections
 “Lack of liquidity”
 “Not a good value for the money”
 Customers too young
 Limited knowledge of immediate annuities
 “Withdrawal features on deferred products are superior”
 “No inflation protection”
Source: LIMRA International, Sales Representatives’ Attitudes Regarding Immediate Annuities (2006).

Are GLBs The Answer?
Maybe…
Maintain control
Remain invested in market for long-term growth
Guaranteed
Helps to shift focus to income needs
They are selling!
…Maybe Not
Add to VA costs
Complicated!
Hedging requirements
Don’t maximize income
Not as tax-efficient as annuitization
Guarantees can be lost if too much is withdrawn

Interest In Annuitization Linked to
Lifetime Needs
Retirees
Will guaranteed lifetime income sources be enough to cover basic living expenses in retirement?
Interested in converting portion of assets into guaranteed income to fill this income-expense gap?
Not enough to cover basic living expenses
52%
Very or somewhat interested
37%
Source: LIMRA International, Retirement Income Preferences (2006).

Interest In Annuitization Linked to
Lifetime Needs
Pre-Retirees
Will guaranteed lifetime income sources be enough to cover basic living expenses in retirement?
Interested in converting portion of assets into guaranteed income to fill this income-expense gap?
Not enough to cover basic living expenses
62%
Very or somewhat interested
52%
Source: LIMRA International, Retirement Income Preferences (2006).

Future Developments
Products and Features
 More guaranteed living benefits
 On fixed products also
 Smaller companies will be squeezed
 “Longevity insurance”
 Impaired-risk annuities
 Medically underwritten immediate annuities
 Higher payouts if long-term care is needed
 Combination products (long-term care / annuity)

Future Developments
Other Trends
 Retirement plan rollover market expansion
 Erosion of tax-deferral advantage over taxable alternatives
 Possible tax breaks on lifetime payouts
 Return to “normal” interest rate environment should help fixed and immediate annuity sales
 Growing awareness of retirement income and
“decumulation” issues

P R E S E N T E D B Y
Shlomo Benartzi
Co-Founder, BeFi
Associate Professor Co-chair of the
Behavioral Decision Making Group
The Anderson School at UCLA
Warren Cormier
Co-Founder, BeFi
President, Boston Research Group