8ANNUITIES Annuities are financial contracts that pay a steady stream of income for either a fixed period of time or for the lifetime of the annuity owner (the annuitant). Most pension and retirement plan assets held by life insurers are annuity contracts. Because they can guarantee a stream of income for life, annuities protect annuity owners against the possibility of outliving their financial resources. Annuities are sold as either immediate annuities or deferred annuities. Immediate annuities begin making annuity payments immediately, while deferred annuities defer the onset of annuity payments until some later date (typically when the annuity owner retires). During the deferral or accumulation phase, the annuity owner makes premium payments into the annuity and the savings inside the annuity grows to maximize the later annuity payments back to the annuity owner. Codification of annual statements, effective for 200 filings, changed the way certain lines of business are categorized and reported. This is particularly true of annuities and deposit-type contracts (e.g., guaranteed interest contracts or GICs). Prior to 200, deposit-type funds were included with annuities; now they are reported separately. As a result, annuity data prior to 200 is not comparable with 200 or later data. During 207, payments into annuities, known as considerations, decreased 9.5 percent to $34 billion (Table 8.), while annuity reserves increased 6.6 percent to $3.8 trillion (Table 8.2). Annuities provide a variety of features designed to meet different needs. Depending on risk tolerance, an annuitant can choose a fixed annuity, which provides stable returns, or a variable annuity which is backed by equity investments for potentially greater, but uncertain, returns. A joint and survivor annuity ensures an income stream as long as either spouse is alive. Under some options, payouts will continue to a designated beneficiary after the annuitant s death. GROUP AND INDIVIDUAL ANNUITIES Contributions to group annuities, which are sold through employer-sponsored retirement plans, increased to $30 billion in 207, 4.5 percent higher than in 206 (Table 8.). Reserves for this type of annuity accounted for nearly one-third of all annuity reserves by the end of 207 (30%), or $. trillion (Table 8.2). Benefit payments to group annuitants increased to $29 billion, up 2.9 percent from 206 (Table 8.3). Employer-sponsored retirement plans are divided between two types that differ according to their benefits structure. Defined benefit plans provide a specified monthly benefit during retirement. The benefit amount is usually based on an employee s salary and length of service. The employer funds such plans and bears the entire investment risk. Profit-sharing, 40(k), 403(b), and 457 plans are defined contribution plans. Rather than specifying benefits and retirement income, this type of plan specifies contributions, usually as a fixed amount or a percentage
of income, where the employee bears the investment risk. The benefit received under defined contribution plans is determined by contributions, investment returns, and expenses. Annuitization of the balance at retirement is not mandatory, and lump sums have been the most popular distribution method. A person can also buy an annuity directly from a life insurer. During 207, Americans deposited $65 billion in individual annuities, down 8.5 percent from 206 (Table 8.). Individual annuity owners received $53 billion in benefit payments (Table 8.3), leaving $2.6 trillion in individual annuity reserves at year-end 207 (Table 8.2).. SUPPLEMENTARY CONTRACTS, ANNUITIES CERTAIN, AND OTHER ANNUITIES A supplementary contract is an agreement between an insurer and a life insurance policyholder or beneficiary in which the beneficiary chooses to receive the policy s proceeds over a period of time instead of as a lump sum. If this period is the lifetime of the beneficiary, the contract is a supplementary contract with life contingencies, essentially a life annuity; if the payments continue for a specific period, the contract is called a supplementary contract without life contingencies, or an annuity certain. During 207, $9 billion was deposited into supplementary contracts without life contingencies and annuities certain, 5.3 percent less than in 206 (Table 8.), and $20 billion was paid to policyholders or beneficiaries (Table 8.3), leaving a total reserve of $90 billion at the end of 207 to back future claims (Table 8.2). Table 8. Annuity Considerations Millions Average annual percentage change 2007 206 207 2007/207 206/207 Individual annuities $92,503 $202,32 $64,790 -.5-8.5 Group annuities 2,722 24,484 30,070 0.7 4.5 Annuities certain and supplementary contracts without life contingencies 27,9 9,869 8,8-3.6-5.3 Total 34,344 346,664 33,67-0.8-9.5 Notes: NAIC does not endorse any analysis or conclusions based on use of its data. Data represent U.S. life insurers and fraternal benefit societies. Includes supplementary contracts with life contingencies. Premiums are net of reinsurance business and fluctuate with reinsurance activities as well as sale changes. Please see Chapter 6 for reinsurance business. 74 American Council of Life Insurers
Table 8.2 Reserves for Annuity Contracts Millions Average annual percentage change 2007 206 207 2007/207 206/207 Individual annuities $,633,095 $2,43,793 $2,572,28 4.6 6.6 Group annuities 843,46,053,070,28,756 3.0 7.2 Annuities certain and supplementary contracts without life contingencies 72,249 89,98 89,849 2.2-0. Total 2,548,490 3,556,845 3,790,733 4. 6.6 Notes: NAIC does not endorse any analysis or conclusions based on use of its data. Data represent U.S. life insurers and fraternal benefit societies. Includes supplementary contracts with life contingencies. Table 8.3 Annuity Benefit Payments Millions Average annual percentage change 2007 206 207 2007/207 206/207 Individual annuities $42,897 $50,833 $52,543 2.0 3.4 Group annuities 29,435 28,287 29,06-0. 2.9 Annuities certain and supplementary contracts without life contingencies 29,569 9,573 20,37-3.7 3.8 Total 0,902 98,692 0,966 0.0 3.3 Notes: NAIC does not endorse any analysis or conclusions based on use of its data. Data represent U.S. life insurers and fraternal benefit societies. Includes supplementary contracts with life contingencies. Annuities 75
Table 8.4 Annuity Considerations, by Year (millions) Year Individual Group 2 Other 3 Total 977 $4,552 $0,422 NA $4,974 978 4,454,885 NA 6,339 979 4,976 2,963 NA 7,939 980 6,296 6,33 NA 22,429 98 0,290 7,289 NA 27,579 982 5,96 9,448 NA 34,644 983 4,003 6,54 NA 30,544 984 5,706 27,53 NA 42,859 985 20,89 33,008 NA 53,899 986 26,7 57,595 NA 83,72 987 33,764 54,93 NA 88,677 988 43,784 59,494 NA 03,278 989 49,407 65,590 NA 4,997 990 53,665 75,399 NA 29,064 99 5,67 7,99 NA 23,590 992 6,348 7,297 NA 32,645 993 76,987 79,458 NA 56,445 994 80,832 73,07 NA 53,849 995 77,370 82,565 NA 59,935 996 84,067 92,228 NA 76,295 997 90,92 07,355 NA 97,547 998 95,446 34,047 NA 229,493 999 5,62 54,59 NA 270,22 2000 43,07 63,622 NA 306,693 200 4 4,656 09,599 $22,675 273,930 2002 4 68,428 00,86 22,608 29,897 2003 4 65,943 02,64 2,8 290,369 2004 4 72,40 04,537 24,352 30,029 2005 4 67,032 0,084 25,479 302,596 2006 4 87,083 5,645 26,344 329,07 2007 4 92,503 2,722 27,9 34,344 2008 4 208,965 9,69 26,842 354,976 2009 4 28,853 02,727 24,053 255,633 200 4 89,946 03,677 27,372 320,995 20 4 27,837 7,058 24,247 359,42 202 4 89,258 58,837 2,340 369,435 203 4 79,578 08,09 9,59 307,260 204 4 247,426 4,60 20,057 38,642 205 4 208,93 24,03 9,347 352,363 206 4 202,32 24,484 9,869 346,664 207 4 64,790 30,070 8,8 33,67 Notes: NAIC does not endorse any analysis or conclusions based on use of its data. Data represent U.S. life insurers and, as of 2003, fraternal benefit societies. NA: Not available Beginning in 200, includes supplementary contracts with life contingencies. 2 Beginning in 986, data reflect a change in statutory reporting methods mandated by the National Association of Insurance Commissioners. 3 Includes supplementary contracts without life contingencies, annuities certain, lottery payouts, structured settlements, and income payment options. 4 Codification effective with 200 Annual Statement filings changed the way certain lines of business are categorized and reported, particularly deposittype contracts. Since most guaranteed interest contracts (GICs) and other deposit-type funds are under group contracts, this accounting change has had a substantial effect on group annuities. Premiums are net of reinsurance business and fluctuate with reinsurance activities as well as sale changes. Please see Chapter 6 for reinsurance business. 76 American Council of Life Insurers
Table 8.5 Annuity Reserves, by Year Year Reserves (millions) Year Reserves (millions) 960 $8,850 965 27,350 970 4,75 975 72,20 980 66,850 98 93,20 982 233,790 983 269,425 984 33,25 985 373,475 986 44,390 987 495,420 988 562,55 989 624,290 990 695,700 99 745,950 992 768,25 993 825,375 994 878,460 995 972,560 996,32,494 997 $,454,962 998,608,494 999,780,699 2000,89,680 200,585,008 2002,69,075 2003,899,994 2004 2,05,882 2005 2,258,240 2006 2,45,58 2007 2,548,490 2008 2,223,44 2009 2,52,334 200 2,739,686 20 2,80,77 202 3,003,685 203 3,27,345 204 3,385,586 205 3,407,220 206 3,556,845 207 3,790,733 Notes: NAIC does not endorse any analysis or conclusions based on use of its data. Data represent U.S. life insurers and, as of 2003, fraternal benefit societies. Codification effective with 200 Annual Statement filings changed the way certain lines of business are categorized and reported, particularly deposittype contracts. Since most guaranteed interest contracts (GICs) and other deposit-type funds are under group contracts, this accounting change has had a substantial effect on group annuities. Annuities 77