The income annuity used to be a straightforward if somewhat opaque gadget. You exchanged a chunk of money for a monthly or quarterly income stream whose rate was set by your age, sex, premium and how long you wanted the payments to last.
Simple, yes. Popular outside the academic and public policy realms? No. Despite talk about an "annuity puzzle," there's no big mystery why these products sit on the shelf. In a "Have It Your Way" culture, they're inflexible, illiquid, irrevocable and, for folks without great genes, adversely priced.
But you knew that. You may not have known that three annuity issuers--Hartford Life, Lincoln Financial and Presidential Life--have recently developed income annuities that do let contract owners "have it their way." I think they're interesting; but you can't add liquidity without diluting the payout rate.
Take, for instance, Presidential Life's two-tier income product, introduced last summer, which combines a life annuity and a temporary life annuity.
Temporary life? Sounds like an oxymoron. Actually, it's a way to boost payout rates in a low interest world. The contract pays the first annuitant an income for life. The survivor--perhaps the first annuitant's mature child--receives income for life or for five to 20 years, whichever is less.
The second income stream, in effect, provides a bequest, which traditional income annuities don't offer. And because the insurer caps its longevity risk on the survivor, it can offer a higher payout rate from day one. Presidential Life has only a B+ rating, but Moody's lauds the Nyack, N.Y. firm for shrinking its debt and escaping the worst effects of the financial crisis.
Lincoln Financial Group, meanwhile, believes that boomers want an income annuity with both inflation-protection and liquidity features. So the Philadelphia firm bundled three such features into its recently re-launched SmartIncome annuity as standard equipment, not options.
The income stream is indexed to the CPI-Urban and contract owners can withdraw up to 10 percent of the present value of the income stream each year penalty-free. They can even cancel the contract at any time and take a refund of the unpaid premium.
The newest of the new income annuities is Hartford Life's Personal Retirement Manager, which combines a variable account, a fixed return account, and a "Personal Pension Account." The PPA is a deferred income annuity contract owner with a single or multiple premium of at least $10,000 before eventually converting it to a guaranteed income. This product, an extension of Hartford's Leaders suite of variable annuities, appears to give boomers everything: investments in mutual funds, safe growth of principal, liquidity, guaranteed income, and a bequest.
Will these new income products expand the annual income annuity pie? Hard to say. New York Life, which dominates the income annuity niche, offers lots of liquidity options on its products, but I'm told that most new clients pass up the flexibility in favor of higher payout rates. Still, innovation in the SPIA space is welcome. Millions of middle-income boomers are going to need it.
Kerry Pechter is the author of "Annuities for Dummies" and editor of retirementincomejournal.com.