Clients and prospects are worried about retirement, costly long-term care and an uncertain legacy. The good news for producers is a trio of established and emerging riders - layered on an indexed annuity -- directly addresses these concerns. For producers, the market is favorable and growing as baby boomers, many of whom lost money in the recession, begin retiring.
The aging of the population will accelerate over the next several decades. According to the U.S. Census Bureau, by 2030 there will be 71 million people age 65 or older, twice as many as there were in 2000. In just 20 years, nearly one in five Americans will be 80 or older. There is more of a need for and an appreciation of indexed annuity benefit riders.
The increased focus on indexed annuity riders is being driven in part by the current interest rate environment. Historically low interest rates are exerting downward pressure on indexed account cap and participation rates. As a result, clients question whether their indexed annuity account values can support a meaningful lifetime retirement income stream. For example, clients may worry an indexed annuity may not earn enough to maintain a 5% annual withdrawal.
Three trends, three solutions for producers
Of the three benefit trends, the most established is the guaranteed lifetime withdrawal benefit rider (GLWB). These riders have become very popular. The election rate on products that offer withdrawal benefits increased to 56.6%in 2Q 2010, up from just 12.2% in 1Q 2008, according to AnnuitySpecs.com.
The second trend, which is expected to accelerate as a result of a provision in the Pension Protection Act that became effective in 2010, is the layering of a long-term-care rider on an indexed annuity.
Finally, an increasing number of insurance companies are offering indexed annuity products with optional enhanced death benefits.
For producers, each of these three benefit trends -- combined with the security, stability and tax advantages of an indexed annuity -- are providing the flexibility and options they need to serve the needs of many of their older clients.
GLWBs: A remedy for outliving assets
One of the main benefits of GLWB riders for clients and producers is they can be used to meet different retirement income needs, including "income now" and "income later" scenarios. "Income now" buyers may have come up short on their retirement savings because of investment losses or other setbacks, while "income later" buyers anticipate an accumulation period of 10-15 years and a deferred income need. In either case, they address the common fear of outliving one's assets.
The guaranteed income amount provided by GLWBs is typically based on a "benefit base." The benefit base is initially set equal to premium but can increase as a result of various factors, such as bonuses, increases in account value or other enhancements provided under the terms of the rider. The amount available for withdrawal is computed by multiplying the benefit base by a withdrawal percentage that is often dependent on age.
The "income now" client plans on starting withdrawals within the first few years of opening their contract. A GLWB rider tailored for the "income now" client might provide an upfront bonus to the benefit base. For example, a 15% bonus to the benefit base is designed to provide an immediate additional value at a time when retirement assets may have been depleted.
The "income later" client doesn't need immediate income and, therefore, defers the commencement of guaranteed withdrawals. A GLWB rider tailored for the "income later" client might provide a guaranteed growth rate during the deferral period. For instance, an 8% compound growth rate might be added to the benefit base each year the client defers the start of withdrawals. The longer the deferral period, the higher the level of guaranteed retirement income.
All withdrawals from an annuity are subject to ordinary income tax and, if taken prior to age 59 1/2 , a 10% tax penalty may apply.
LTCI rider gains from PPA change
With increased longevity and the escalating cost of long-term care, adding a long-term care rider to an indexed annuity adds another layer of security. It gives clients and families more choice in care facilities and protects their savings and other assets. It also helps ensure a caregiver doesn't exhaust his or her physical, emotional and financial resources tending to a family member who requires constant care.
By adding an LTC rider to an indexed annuity, clients may have access to a higher percentage of the account value without applicable charges for a specified period of time. Additionally, some designs involve an accelerated payout of the account value accompanied by an independent insurance benefit.
Under the coinsurance design, accelerated benefits are paid concurrently with independent benefits.
Producers and clients got a welcome boost when the long-term care provisions of the Pension Protection Act of 2006 became fully effective as of Jan. 1, 2010. Under this act, contract holders can combine long-term care insurance with an annuity as part of one contract.
In addition, contract holders can do a tax-free exchange of an annuity for a long-term care contract. Thus, these changes in federal law created an opportunity for consumers to purchase annuities with riders that provide for long-term care and have the payments from the qualified LTC riders receive the same favorable tax-free treatment that is available to stand-alone long-term care products.
Many combination products integrate the annuity and LTC rider so as to provide more comprehensive protection. Accordingly, if the consumer does not qualify for long-term care, taxable annuity payments may be made, but if the qualifications for long-term care are met, the payments are received tax-free.
In some cases, this integration provides more options than a stand-alone long-term care policy plus an annuity would have provided separately. As a result, producers have an opportunity to advise their clients on the benefits of layering an LTC rider on top of their indexed annuity as another retirement option.
For example, a client purchased an indexed annuity with a single premium of $100,000, and after three years, his account value has grown to $110,000. Without the LTC rider, he could withdraw only 10% of the account value, or $11,000, without incurring additional charges. He would also pay income tax on $10,000 of that withdrawal.
However, if the client has an LTC rider and meets the qualification provisions, he may be eligible to withdrawal a greater percentage of the account value, and the withdrawal should be free of income tax and any applicable surrender charges. In addition, if the LTC rider provides for a 20% coinsurance design, the account value will only be reduced by 80% of the benefit payment and the remainder would be paid as an insurance benefit.
Leaving a legacy with enhanced death benefit
In another important trend, insurers are offering enhanced death benefits and, in one case, a combination rider that provides an enhanced death benefit in addition to an income benefit. These products provide an income stream while also enabling clients to leave a legacy for their families, favorite charities or other beneficiaries.
Some enhanced death benefits guarantee the death benefit amount increases by a specified amount each year regardless of the performance of the underlying account value. Under the combination design, clients can maximize their income opportunity by deferring the start of withdrawals under their GLWB, while remaining protected by the enhanced death benefit until the beginning of the guaranteed withdrawals. The combined product can be structured so it has just a single premium, making it easier to explain and price for clients.
Let's suppose you have a client who doesn't need retirement income for another 15 years. This is the "income later" client we referred to above. But, what happens if this client were to die during this deferral period? An enhanced death benefit would provide the client with a guaranteed minimum level of protection to pass on to his beneficiary.
With an aging population that is living longer than ever, producers have the opportunity to reach a growing population with timely products that address their concerns. Given the challenges and uncertainty many older people are facing, producers who educate their clients or prospects about these valuable indexed annuity riders can earn loyalty, referrals and sales.
Dana Pedersen is a vice president for The Phoenix Companies Inc., responsible for annuity product development and pricing. She has expertise in pricing and developing immediate and deferred variable, fixed and indexed annuities, including guaranteed living and death benefits. Pedersen assumed her current role in 2007 after holding increasingly senior positions in annuity product development beginning in 2000. She joined Phoenix in 1995.