An insurance policy designed to insure that retirees don't run out of money?
A handful of insurers have been touting "longevity insurance" for several years now-an income annuity-based product they hoped would catch fire with retirees frightened of going broke. The typical product works like this: In exchange for a single premium payment upfront, insurers promise to pay monthly income to the annuitant starting at age 85-indeed, providing insurance that the retiree would never run out of money at that age or after. Although insurers' sentiment might have been in the right place-now, more than ever retirees fear their nest eggs won't go the distance-in its plainest form longevity insurance has been relatively restrictive, locking assets away from the annuitant for years and from heirs forever. As a result, even insurers admit that the plainest form of the product has not been a great seller-but all that may be changing.
"I've been around this business for awhile, and I don't think I've heard brokers or clients really request longevity insurance," says Bryan Place, CFP, president of Place Financial Advisors and the creator of AnnuityQuickQuote.com, an immediate annuity marketplace based in Manilius, NY. "I think the real longevity products of the future will combine deferred and variable annuities. Some of the payouts are competitive enough already to make this product compelling for the right client. But I think advisors and investors have had concerns over liquidity and whether or not the annuitant can access their money earlier than age 85, if they need to. Those concerns are driving the marketplace to change," Place says.
Indeed, some of the insurance executives we spoke to admit that liquidity can be a concern, but they maintain that some of the bells and whistles and the flexibility they've begun to add to their products make them much more enticing than the first generation of longevity products. In fact, several leading insurers are sweetening their longevity products with "facility-based riders," payment options and estate planning flexibility.
The reason for the increase in annuity products is multifaceted. Not only is a drove of baby boomers set to retire, many of them without adequate retirement assets, the current crop of boomers is retiring at a time when investment markets are producing few gains and many losses. Enter annuities, which a recent Wharton Financial Institutions Center study co-sponsored by New York Life Insurance Co. found could produce a lifelong cash stream for investors at a cost that is as much as 40% less than a traditional portfolio of stocks, bonds and cash. That means an investor at age 65 can guarantee the same income with $600,000 that a neighbor may need $1 million to produce with stocks, bonds and cash-and without the guarantee. For actual payouts read on.
Income annuities can also be critical to mitigate the risks of longevity, says the study's co-author David F. Babbel, an insurance and risk-management professor at the Wharton School. While "on average" half the population lives until 85, half of those who make it past age 65 will live beyond the age of 85. And all of those people who live past 85 have a chance to live past 100, and they are going to need income, Babbel says. That is where sound income planning, especially the concept of income annuities with longevity features, can be so beneficial, he adds. Since they guarantee income for life, the investor sidesteps the risk of unfortunate investment decisions, poor performing markets and running out of money.
More food for thought, especially for advisors who want to ensure that investors have income past age 85: The Wharton study found that "income annuities are the only asset class that most effectively addresses the risk of outliving your nest egg, because they generates a permanent stream of income, unlike a typical nest egg of stocks, bonds and cash." Equally important, the Wharton study found, is the fact that investors who place their retirement assets in mutual funds "are subject to greater risk, typically higher expenses and returns that are unlikely to keep pace with annuity returns, when investment risk is taken into account." The study also confirmed that annuitizing part of an investor's portfolio will allow for much greater investment flexibility in other areas of his or her retirement plan.
All things considered, income annuities are a product that advisors are going to be encouraged to become a good deal more familiar with in the next couple of years. If not by The Wharton Study and mounting research, then by investors and possibly their aging parents who are in dire need of maximizing and guaranteeing long-term income.
To find out the latest in offerings, we turned to The Hartford, John Hancock and New York Life to see what their most recent product introductions in this space look like and which investors might benefit from insuring for longevity.
The Hartford is offering two products, Hartford Income Security (HIS is their pure longevity insurance product, which begins payouts at age 85) and the Hartford Income Annuity (HIA), which allows investors to begin taking income at their discretion, beginning at age 65. "We've seen a lot of interest recently in all guaranteed-payout products given the market recently," says Scott Sanderson, vice president of marketing at The Hartford. "We've all seen the numbers, but it really hits home when you see friends or family who have retired at the wrong time. If you take more than 4.5% or 5% out of your regular retirement accounts annually and live a long life, you're going to run out of money, especially if you retire at the wrong time."
The HIS product answers "the challenge to provide pure longevity insurance, and we think the best deal is the product in its purest form." The payouts begin at age 85 and the elections you make regarding payouts are irrevocable, but you can buy a "facility care" rider that will allow you to begin taking payouts early if you certify you need facility-based care.
The Hartford introduced HIA in March, to give investors the ability to start taking payments sooner. "We introduced the new product because sales on the pure longevity product were not as good as we hoped," Sanderson says. "We've gotten brokers to buy in intellectually, but for various reasons they've had a hard time pulling the trigger with their clients en masse. We've heard: 'You can show me on paper that it makes sense, but it's really hard to get a client to turn over a lump sum for payments deferred way out in the future.'"