So, you’re a baby boomer, and retirement is just up ahead. But unlike your Greatest Generation father, you don’t have a pension, and now it’s up to you to convert your company’s 401(k) into an income stream for the rest of your life. So who do you turn to for help?
According to experts on a panel at yesterday’s 23rd annual Executive Conference titled “Current State of Retirement Income Industry: State of Mind or State of Emergency?,” the life insurance industry has a solution: income annuities and in particular, deferred income annuities. The event was hosted by Ernst & Young and Summit Business Media at the Crowne Plaza Times Square hotel in New York City and ends today.
Moderator Christopher Raham, a principal in the Insurance Advisory Services practice with Ernst & Young, said there is a “state of emergency” among boomers and their retirement savings and how to secure income and lifestyle protection in retirement. “In this country, today, the vast majority are not set up for retirement,” he said.
Meanwhile, insurers are recognizing the problem and stepping up with new approaches and products. For instance, about five years ago, Northwestern Mutual launched its retirement income strategy that focused on three goals: giving consumers income for life; protection for their retirement assets in the case of a long-term care event; and the ability to leave a legacy to heirs or a charity, detailed Rebekah Barsch, vice president, market strategy, at Northwestern. The aim of the program was on planning for retirement, not on any specific product. “No one product can meet those multiple goals,” she said, specifying long-term care insurance (LTCI), investments, life insurance and annuities as such tools.
The insurer then instituted a training program for its field force that included education on Social Security claiming tactics as well as liquidation strategies, Barsch added. Advisors already well-versed in retirement planning shaped the course and led the teaching effort, and the company monitors the planning process by each advisor and tracks which products are ultimately sold. “We feel good about the results,” she said.
As part of a retirement plan, annuities can protect against longevity. Barsch also noted that for those with under $6 million in assets, purchasing LTCI is good choice since it boosts overall retirement income. “People are misinformed (about LTCI),” she said. “It’s better to pay that premium.”
Seeking retirement “alpha”
Retirement expert and author Tom Hegna, right, president of Tom Hegna.com, said that the life insurance industry has a “monopoly” on solving what he termed the baby boomer retirement crisis.
Because the life insurance industry balances both side of the longevity equation—with life insurance the risk is that a policyholder dies too soon and with annuities the risk is the owner lives too long—it is the only industry that can provide “retirement alpha” or the highest amount of guaranteed retirement income, Hegna said. “No other institution can do that,” he said. “Not CDs, banks or bonds.”
The hottest annuity product today is the deferred income annuity, or DIA, Hegna said. These can purchased when the policyholder is, say, 45 or 50 and then turned into an income stream at 60 or 65.
Curtis Cloke, CEO, Thrive Income Distribution System, LLC, who Hegna referred to as “Dr. DIA,” outlined how DIAs, SPIAs (single premium income annuities), or any annuity with a GLWB, or guaranteed lifetime withdrawal benefits, can be used to cover a person’s essential needs in retirement while other funds can be used for growth-oriented investments for legacy planning and extra money.
In response to a question from the audience, Cloke said that the number of carriers offering DIAs has grown from two in 2004 to a dozen in 2013. Those companies, like Northwestern Mutual, are mutuals. “This is a business line they want to get into,” he said.
Hegna added that SPIAs and DIAs “are competitive no matter what interest rates do,” adding that he doesn’t “see hyperinflation happening anytime soon.”
Who will see them?
As popular as DIAs or life insurance may be, the question for the industry is who will sell those products? During the conference, several executives commented on the dwindling and aging sales force.
“We need more brave men and women to go into life insurance,” said Scott Brennan, incoming president of MDRT. “We have great people, but we are fewer and we are older.” He spoke during the “A View into the Corner Office: CEO Headline Address.”
His remarks were echoed by Donald “Butch” Britton, CEO, Insurance, of ING U.S., who spoke at the day’s closing keynote address. He attributed flat life insurance sales numbers to a lack of agents making sales calls. He pointed out that 49 percent of Americans own individual life insurance, indicating a huge untapped marketing, especially within the middle market. “There are not enough agents to sell to the public,” he said.
Another issue is that agents may be targeting the high-net-worth market at the expense of the middle-market and affluent segments. This could come back to haunt the industry at a time when Congress is looking for extra revenue. If it appears the industry is only selling to the rich, Britton said, the product’s tax advantages may be called in question.
The industry faces other headwinds, including low interest rates. Given the industry’s importance to the economy, Britton questioned why the Fed would keep interest rates so low. “It’s damaged the life insurance industry,” he said. “People should worry about what the life insurance industry is going to do.”
Those low interest rates have forced carriers to pull products with long-term guarantees, Britton said. However, he predicted that indexed products are the wave of the future.