This annuity pays a fixed amount of monthly income later in life at age 85 or earlier, depending on the contract. Because the future income is guaranteed by the insurance company, more money can be invested in stocks or withdrawn earlier from other accounts.
Provided that you can't find a better way to maintain the purchasing power of a retired client's income, combining a managed payout mutual fund with a deferred immediate annuity may fit the bill, Kleinberg adds. For example, Pimco and MetLife teamed up in March 2011 so clients could buy both simultaneously. In the Pimco Real Income Fund, clients get a managed payout mutual fund designed to keep pace with inflation. When funds in the mutual fund are exhausted, the MetLife Longevity Income Guarantee (LIG) annuity kicks in to provide lifetime income.
Some advisors believe there are attractive alternatives to longevity insurance. Reesa Manning, registered investment advisor with Integrated Wealth Management, Palm Desert, Calif., says she would rather invest, for example, $100,000 in a well-managed stock fund today and let it grow for 10 or 15 years. Then she might consider annuitizing the money.
"The biggest issue is the gamble on longevity," she says. "You are gambling on living to an appointed age to collect your benefit. But you are giving up control of your investment."
New York-based financial planner Lewis Altfest says that some people may just benefit from postponing Social Security until age 70. That payout is 1.85 times higher than at age 62.
If you do invest in a deferred-income annuity, it is more cost-effective to the insurance company if a client invests a lump sum, according to research by Shanghai University finance professor Guan Gong, and Boston College finance professor Anthony Webb. The two cite the higher administrative costs of collecting small premiums over many years as well as the greater mortality risk to the insurer.
Meanwhile, James Hunt, a Concord, N.H., actuary, says advisors must price the policies of a number of issuers. "To the extent that insurance companies guaranteed the rate of growth or the settlement option rates, the current level of long-term interest rates is critical to pricing," Hunt says.
Advisors must ensure that their clients understand the longevity insurance contract. "It's great for the right retiree because it solves the problem of never outliving income," Robert Bloink, law professor at the Thomas Jefferson School of Law, San Diego, says. "They must understand the interest rate issue in determining income payments. Many may never collect a dime with a life-only policy."