The oldest of the baby boom generation turns 60 this year. It is also the last year that there are fewer than 3 million 60-year-olds. This number will grow at such a rate that there will be more than 4.5 million new 60-year-olds when the younger segment of the boomers turns 60.
The need to manage an income stream from personal savings will also grow substantially in the coming years. With fewer employers offering traditional pensions and fears of potential cuts in Social Security benefits, more and more people will retire without adequate guaranteed lifetime income streams.
Instead, they will need to tap into their assets on a regular basis just to pay the bills. A recent LIMRA survey found that 62 percent of pre-retirees anticipate not having enough income to cover their basic living expenses in retirement. Fifty-two percent of retirees say they are already in such a pinch. Over half of the pre-retirees and 37 percent of the retirees with (or anticipating) such gaps express interest in purchasing a guaranteed lifetime income stream with a portion of their retirement savings to fill the gap. If they and other like-minded retirees purchased such lifetime income with only a portion of their assets, LIMRA estimates that could translate into payout annuity sales exceeding $120 billion.1 However, with payout annuity sales running between $5 billion and $6 billion each year, this market remains largely untapped. The report "Substandard Annuities" was recently released from LIMRA International and the Society of Actuaries (SOA) and addresses market viability in offering these annuities based on the retiree market needs.
How it works
Payout annuities are usually considered only for clients in relatively good health. However, substandard annuities are now available from at least 10 insurers (See Table 1), and more companies are getting into the business each year. Substandard annuities, also referred to as rated annuities, offer higher monthly in-come for clients with shorter-than-average life expectancies. They can be an excellent choice for clients with health issues who are still concerned about having adequate income for a potentially long retirement.
Selling a standard payout annuity is simple. Once you have selected a carrier and received a quote that you and your client like, you submit the application and the funds. Substandard annuities require underwriting first, however. Unlike life insurance underwriting, a process usually driven by the insurer after receipt of the application, the agent gathers medical information from the client and submits it to one or more carriers for a rating. Different insurers have different requirements regarding what information they want to receive. With most insurers, if the information submitted qualifies for a substandard annuity, the carrier will respond with an age rating. Once you have submitted the medical information and have received an age rating, you can then run your own quotes and discuss with your client which product and company offering best meets their needs. Some companies will provide the quote when they present the age rating to you. Most insurers use the same application for both standard and substandard payout annuities. They will ask questions on their applications to see whether they are for substandard annuities; if so, they will ask to have the age-rated letters from the underwriters included with the application.
A case study
Say you have a 65-year-old male client with a history of heart disease. You gather the appropriate medical information and submit it to a carrier. They review the information and determine that your client has a life expectancy not of the average "healthy" 65-year-old male client, but rather that of a 70-year-old. You would then run a quote for your client assuming he is 70. By qualifying for a substandard annuity, your client could receive $774 per month for life, a 14 percent increase over the $680 per month if he had otherwise purchased a standard annuity (See Table 2).
As these numbers suggest, substandard annuities can be a powerful tool for helping clients with mild to severe health impairments manage the risk of outliving their financial resources. Given the increase in the need for guaranteed income in retirement, they offer a good addition to the portfolio of every agent involved in retirement income planning.
Eric T. Sondergeld, ASA, CFA, MAAA, is corporate vice president and director of Retirement Research at LIMRA International. He can be reached at 860-285-7754 or esondergeld@limra.com.
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