Those born between 1946 and 1964 comprise about 77 million baby boomers speeding toward retirement, fraught with massive anxiety about having enough income to last 20 or even 30 years to come. A behavioral scientist and business professor at New York University, Frank Murtha, referred to this anxiety as "paralysis." His 2002 research concluded that 80% of boomers are concerned about having adequate income during retirement, yet half aren't sure how much income they need. Boomers' top concerns include the effects of inflation (80%), health concerns (79%), uncertainty about Social Security (74%), fear of outliving resources (72%), and the adverse effect of stock market conditions (58%).1
Three years later, a study by the National Association for Variable Annuities mirrored this research with a report that demonstrated that 95% of people in the United States have financial fears about retirement. Their biggest concern? Having enough retirement income. Forty-two percent of respondents indicated that they were afraid that they would "run out of money prematurely, or have to downgrade their lifestyle in retirement."2
In May 2006, New York Life sponsored a study that showed that only 10% of people in the U.S. understand how much of their retirement savings they safely can spend each year without running the risk of outliving their assets. In the survey, 40% of respondents admitted they do not know how much to withdraw without spending down their savings.3
Variable Annuities Find Income-Planning Niche
In light of this boomer anxiety, it's no surprise that income planning has become such a mainstay in the insurance and financial services industries. Income planning is a client-centered approach that focuses not only on asset-saving objectives but also on distribution planning to help ensure income to last many years into retirement -- despite common retirement risks such as longevity, rising health care expenses, inflation, taxes, and market downturns.
Already finding their niche in income planning, variable annuities have netted big results. By the end of the fourth quarter 2005, the combined net assets of U.S. variable annuities increased 2.3% to $1.2 trillion compared to the end of the third quarter 2005.4 Variable annuities, in their purest form, are principal-at-risk products meant to perform with risk-based options.5
Why is a variable annuity attractive to a retiree? The real answer simply is this: living benefits. Eighty-five percent of variable annuities now offer living benefits,6 with guaranteed lifetime withdrawal benefits (GLWB) being the most popular. This increasingly sought-after benefit guarantees an income payment for life without requiring annuitization. A fixed percentage, usually 4% to 6%, of the annuity premiums can be withdrawn annually for as long as the annuitant lives. These payments continue even after the initial investment amount has been paid out and regardless of the actual account value. The annual charge for these benefits usually ranges from 0.40% to 0.75% of account value per year.
Indexed Annuities Lead Next Generation of Income Planning
Why wouldn't consumers want to purchase a product that's specifically built for retirees and retirement-planning purposes? Indexed annuities are a common-sense solution for easing boomer "paralysis." Their principal protection, annual lock-in, and ratchet features can go a long way to quell fears about having a secure, steady source of retirement income. Built-in principal protection does not require a rider or additional charge and ensures that the clients' premium is protected. The annual lock-in feature (also built in) helps preserve any upside interest credits. And annual ratchets, whether for the death benefit or for measuring interest crediting, also benefit clients without any annual fees or additional charges.
The only thing that's been absent in this indexed annuity solution has been the incorporation of living benefits in the annuity's product design.
The next generation of income planning now includes a revolutionary new indexed annuity design with an optional living benefit: LifetimePaySM.
That's right, this is an indexed annuity with the option of electing a guaranteed lifetime withdrawal benefit. It allows distribution from the annuity without the limits of annuitization. Before getting into an explanation of LifetimePay features and benefits, let's review the underlying fixed interest annuity design. Important to a design that assists clients with their retirement planning concerns are:
o Death benefit -- ratchets annually when any interest is credited to the annuity. No fees are charged for this benefit.
o Accumulated value floor -- increases 1% each year for the life of the policy -- guaranteed. No fees are charged for this benefit.
o Premium allocation and transfer -- available in any interest-crediting strategy. There are no imposed carrier restrictions to receive the benefit.
o Checkbook access -- starts in year one for withdrawals up to 10% of the contract value per year. No fees are charged for this access.
o Nursing home confinement or terminal illness diagnosis -- 100% liquidity in these events. No fees are charged for withdrawal.
o Home health care -- 20% liquidity per year in this event. No fees are charged for withdrawal.
o 20% cumulative withdrawal provision -- No fees are charged for withdrawal.
o 5% premium bonus -- fully vested from day one. No fees are charged.
o Choice of interest-crediting strategies -- allow upside interest crediting including strategies with and without an annual cap on interest earnings.
The last benefit on the list, choice of interest-crediting strategies, is particularly significant. Having this choice means that interest is credited to your clients' annuities at the end of each term, usually annually, based on an interest-crediting method that is linked to an external index such as the S&P 500. For years in which the index is down, no interest usually is credited for that term. But the accumulated value of the annuity never can fall because of negative index performance. These guarantees are inherent to an indexed annuity and are included without any additional fees or charges.
LifetimePay Guarantees Lifetime Stream of Income
LifetimePay guarantees a lifetime stream of income without annuitization. It is an optional living benefit that can be added to the indexed annuity. The benefit guarantees two additional ways to take income from the annuity. Clients can elect withdrawals for a select period of time or elect lifetime income withdrawals that are guaranteed for life. They also can take lifetime income withdrawals based on joint annuitants with incomes that continue until the death of the last surviving spouse.
Upon issue of the annuity, the company establishes an Income Account Value. Initially, this value equals the premium plus any applicable premium bonus. This amount is the basis for determining the amount of income available under the benefit. The amount then is adjusted on an ongoing basis as the annuity and benefits accrue. The annual cost of the benefit is 0.4% of the Income Account Value.
For income planning, benefits can be described in terms of Accumulation Years and Distribution Years.
Accumulation Years
Clients decide the number of years they want their benefits to accumulate before they begin distributions. Prior to taking any withdrawals under the benefit, an Income Account Value is guaranteed to increase at least 4% a year for the annuity's first 10 years. For example, a $100,000 Income Account Value is guaranteed to be no less than $148,024 at the end of 10 years at this 4% rate. Any time after the fifth contract year, clients can reset the accumulation period for an additional 10-year period and then continue 4% interest accumulation. This provides peace of mind because the client knows his or her income benefits still are growing each year. LifetimePay also has a benefit not found on other guaranteed lifetime withdrawal benefits. Clients can take normal withdrawals prior to electing their first LifetimePay withdrawal and their 4% annual interest accumulation guarantee continues. Deferring their first elected withdrawal allows the customer to move into the next higher income percentage payout bracket. Unlike most other GLWB benefits, the withdrawal percentages vary from 4% to 8% per year based on age at the time of the first elected withdrawal.
Distribution Years
Any time after the first contract year, clients can begin taking elected withdrawals with LifetimePay. Withdrawals are based on a percentage of the Income Account Value at the time the withdrawals are elected. Table 1 on page 56 of the July 2006 issue of LIFE INSURANCE SELLING shows these income percentages.
For example, JoAnn purchases an indexed annuity for $100,000 and elects the LifetimePay benefit. If she defers her income for one year, she will receive an annual income check of $5,200. If she defers income for five years, she will receive $6,691 after each year for life. And if she defers income for 10 years, she will receive $8,881 each year for life -- guaranteed. After JoAnn elects income payments, her income never can decrease. The benefit to JoAnn is that the longer she defers her income, the higher her payments will be, all within a principal guaranteed product.
Guaranteed minimum lifetime annual income amounts based on several select issue ages are listed in Table 2 on page 56 of the July 2006 issue of LIFE INSURANCE SELLING. If the annuity-credited rate has averaged greater than 4% before your clients begin their payments, the amounts will be higher than the amounts in Table 2.
Clients can start and stop the income payments at any time. While the payments are stopped, the underlying accumulated value of the annuity will continue to accrue benefits.
Automatic Step-Up
On each annuity anniversary following the first elected withdrawal, clients are eligible for a step-up. This means that the annual income benefit will be "stepped-up" (or increased) if the accumulated value of the annuity exceeds the Income Account Value at that time. This is an excellent benefit that can provide additional income based on the annuity's interest-crediting performance.
Add LifetimePay to Your Income Planning Approach
There are 77 million baby boomers counting on our industry to provide innovative solutions to a retirement planning dilemma that no other generation has faced. As an annuity developer, I think it's astonishing that the fixed annuity industry did not take the product-design lead with living benefits on fixed indexed products. After all, indexed annuities are built for retirement asset accumulation and distribution!
I am proud to have built a product that gives people the next generation of income planning with a revolutionary new annuity design -- LifetimePay.
Footnotes:
1. Thomas, Trevor. "Boomer Diagnosis: 'Financial Paralysis Finds Widespread Lack of Understanding Stymies Action'" National Underwriter, Nov. 1, 2004.
2. National Association For Variable Annuities, March 28, 2005, "95 Percent of Americans Have Financial Fears About Retirement " press release.
3. New York Life, 2006, "Guarantees Matter: Lifetime Income: The New Retirement Challenge" brochure.
4. National Association For Variable Annuities, March 8, 2006, "NAVA Reports Fourth Quarter Variable Annuity Industry Data" press release.
5. An indexed annuity is a fixed insurance product and is not an alternative to a variable annuity. LifetimePay is an optional benefit offered on the AmerUs Life MultiChoice Indexed Annuity Series.
6. National Association For Variable Annuities, Dec. 12, 2005, "Annuity 'Living Benefits' Provide Unique Value" press release.
Randy Timm, CLU, ChFC, FLMI, is Vice President -- Product Development of Brokers International, Ltd. His 24 years of industry experience includes positions in marketing, underwriting, customer service, market research, and product development. He has assisted in developing and marketing indexed products since 1996
