With their retirement nest eggs shrinking, more baby boomers are buying annuities as a hedge against declining returns. The industry expects sales to rise 5% a year for the next three years, reaching a record $265 billion in 2014.
As with any investment, annuities sold by insurance companies come with strings attached. While investing $100,000 in an annuity contract that guarantees income of $7,500 a year for life may sound appealing, it passes up the opportunity for potentially higher returns from a more diversified investment. In addition, there are always a few uncertainties, such as whether the insurer will remain solvent.
Thus, selling annuities as relatively safe investment options takes a sensitive approach. The sales pitches are multilayered, if one can even call them pitches. The process requires agents to probe an individual's needs and appetite for risk before recommending a specific annuity contract to carry that person through retirement.
"You have to carefully evaluate a client's personality, objectives and time frame to retirement," said Steve Kaneski, one of New York Life's top sales agents who works primarily with physicians. "In order to do that you have to dig deep and ask them, "What are you willing to tolerate in terms of volatility?"
As with any other complicated sale, the key is educating the customer, said Lew Nason, an insurance sales trainer who started his own business, Insurance Pro Shop, 12 years ago. Agents can tailor their pitches by asking potential clients questions such as, "Where are your investments right now?" and "Are you worried about running out of money?"
"It's about helping them see they might have a financial problem and then helping them understand that problem," said Nason, who worked for MetLife from 1982 to 1994.
Sales commissions on fixed annuities usually range between 2% to 4%, while the commissions on variable annuities are slightly more. "There are companies that pay their sales agents higher commissions," said Kaneski. "But those are typically not the better companies."
Fidelity does not pay its sales agents direct commissions and leaves it to customers to ask about annuities as potential investment options, said Jeffrey Cimini and Robert Cummings, two Fidelity executives.
"If someone comes into one of our financial investment centers and says 'I need $10,000 a month to live on,' we might talk about an annuity as a fit for that need," said Cimini. "But we don't pitch them and there are times when we will tell a customer that an annuity is not the best fit for them."
That makes selling less about volume and more about quality as a growing percentage of baby boomers reach retirement age. The annuities market saw a surge in sales beginning in 2007 and that growth will continue over the next 15 years, said Cimini.
"We are having the best year in our history this year," he said. "With the gaps in social security and other investments, people are on the look for products that provide lifetime income."
Clients may require three or four in-person meetings lasting two hours each before they feel comfortable investing, said Kaneski, who has worked with New York Life Insurance for 22 years.
"When a client sits in front of me and tells me he or she is nervous, it sends an entirely different message than a phone call or an email expressing the same thing," he said. "When you are working with a client, you have to understand what his or her inner-voice is saying in addition to what that person wants you to hear. During that first appointment, they are evaluating you as much as you are evaluating them."
The best potential clients are either nearing retirement or constantly thinking about it, said Cimini. The opportunity to use annuities for tax deferral or lifetime income makes them a better fit for clients who are in a slightly higher-than-average tax bracket.
To further boost demand, New York Life has begun selling annuities that return the principal to next of kin when the contract holder dies. Usually, the insurance company keeps the original investment on annuities that promise lifetime income, said Kaneski.
"Making a sale is inevitably part of the process, but at the same time you really have to figure out the best match for clients since these are extremely long-term propositions," he said. "A doctor has to sell a prescription to a patient, but that doctor is going to do all of the necessary testing and background examinations before deciding what that prescription might be."
Write to Damian Ghigliotty at Damian.Ghigliotty@dowjones.com
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