As I was Contemplating the content for this column on President's Day 2010, I realized that one of the numerous product descriptions sitting on my desk was issued by no other than Presidential Life. How appropriate, I thought. So, for this episode of Annuity Analytics I would like to review a rather obscure product that has only recently become available for sale: Presidential Life's Single Premium Deferred Benefit Annuity (SPDBA), which the company has christened the Sentinel.
Presidential Life doesn't have a roster of annuity wholesalers prancing around the country in expensive suits, descending on your offices with lunch and cookies, which is why you might have no idea who they are. But as part of my mandate is to shine some light on companies and products that may not have million-dollar advertising budgets, here we go.
How Does it Work?
First, the facts: Presidential Life's Sentinel is not a Variable Annuity with a Guaranteed Lifetime With-drawal Benefit (GLWB). In fact, it isn't an investment-type annuity, or even a savings product. It is tech-nically classified as a fixed annuity. Moreover, once you hand over your initial money premium, the Sentinel has no cash surrender or accumulation value nor can it ever be converted back into cash, after the obligatory free-look period.
So, you ask, why in the world would anyone purchase this?
The answer is that Presidential Life's Sentinel provides longevity insurance protection at its purest. Although you will not have access to the money once you give the insurance company your premium, just like with any other insurance-against-risk policy it protects you if something goes wrong or the unexpected happens to you. In this case, it protects you against living too long. Yes, that too is unexpected and can wreak havoc on your (or your client's) plans. Elsewhere I have written about the benefits of an Advanced Life Delayed Annuity (ALDA) structure and the Sentinel falls in that category: It only pays off if and when you reach an advanced age.
Here is an example of how this product works. These numbers are generic and only relevant in mid-February 2010. So, keep in mind they may not reflect the pricing you get depending on your state and date of your quote. Here's an example: As a 40-year-old purchaser, if I deposited $10,000 into Sen-tinel and requested a life-only payment with a 30-year delay, I would be entitled to $305 per month starting at age 70, for the rest of my life. So, if I end up living to age 100 I would get a total of $305 times 12 times 30 = $109,800 (ignoring the time value of money, of course). If I die one day -- or 29 years -- before reaching my 70th birthday, my family gets nothing. That is insurance pure and simple. I like the odds.
The table to the right provides a rough indication of payouts at other purchase ages and deferral periods. The actuarial arithmetic is rather simple: the younger you are when you buy a Sentinel (or any pure deferred annuity) and the longer your deferral period, the larger the eventual income. This three-factor relationship is a manifestation of discounting for both mortality and interest. If you want cost-of-living adjustments, refunds, joint life payments, certain periods and all the other wonderful things that come packaged with annuities (but dilute the embedded mortality credits), your guaranteed income will be lower. Remember that these payout numbers can change before you buy (but never after), so make sure to shop around when you get a quote.
Things I Like:
I have long been an advocate of stand-alone longevity insurance and its role. As I explained in the Sep-tember 2009 issue of Research, the optimal retirement portfolio should consist of three types of product "silos": (i.) systematic withdrawal plans; (ii.) investments with downside protection; and (iii.) pure income annuities. The Sentinel is your pure income annuity and is therefore part of the retirement income nutritional pyramid. Think of the following analogy: According to nutritionists, we should all consume an average of 11 milligrams of zinc per day. That is the recommended daily intake to maximize health. Of course, too much zinc will kill you; but, as with zinc, we all need some longevity insurance in our life.
In addition to its longevity insurance benefits, on the non-qualified side this product would be entitled to tax-deferred growth, as well as more beneficial treatment of the lifetime income, as a fraction of that income would be considered return of premium and hence non-taxable. This tax treatment is the raison d'?tre of life annuities and I would be remiss if I didn't mention that numerous other insurance carriers offer variants on this design; nothing unique here.
Things I Dislike:
Unfortunately, one of the major problems with this product is precisely that it is being offered by a company you've probably never done business with. Presidential Life is a company with total assets of $3.6 billion (on a statutory basis in late 2009), and revenues of $290 million. These numbers are a tiny fraction compared to the insurance giants with hundreds of billions of dollars in admitted assets.
Now, normally I wouldn't care how large a company is if I like their chocolate bars, breakfast cereal, running shoes or even car insurance for that matter. But when it comes to long-dated insurance and protection which doesn't start paying for another 20 to 30 years; the company's size, age and agility becomes of utmost concern. Alas, Presidential Life has (only) been around since 1965 -- I would like to see an eight or a seven in the second digit before I'd be willing to involve them in a bet that hinges on protecting me if I get to a century.
To add to my discomfort, this company has a financial strength rating of B+ by the credit rating agency A.M. Best, which is just one notch above "vulnerable." Note that each one of the Nationally Recognized Statistical Rating Organizations (NRSRO) has its own unique scale (to drive us batty). For A.M. Best, there are five categories above the B+ rating (they are B++, A-, A, A+ and A++). In today's environment of heightened credit awareness, this rating would mean the product is a non-starter for many gatekeepers. And I can't blame them, despite the fact that the company is domiciled in New York, which adds an element of safety.
Who is the Ideal Candidate?
Credit issues aside, the ideal (a.k.a. suitable) candidate for this product is precisely someone who is looking for protection as opposed to an investment. The company itself makes it quite clear in their con-sumer guide that the recommended amount to be deposited into this product should not exceed 15 percent of a client's liquid net worth. I agree. With this protection in place you can use the other 85 per-cent to speculate on real estate or gamble on the size of the equity risk premium and future price of gold.
Presidential Life has a rather elaborate interview and verification process -- at least more so than I normally see -- to ensure sales are suitable and do not involve any fraudulent conveyance. As you can imagine, with no annual statements or quarterly reports, the potential for abuse should lead to increased vigilance. Think about it: You hand over $10,000 or $100,000 to an insurance company and you get a piece of paper which you put in a safety deposit box for 30 years. Then, in 2040 you inform said company that you are still alive -- please send me my check. Hey, I can think of some nefarious outcomes to this. Can you?
I grade the Sentinel with a comprehensive 8/10. I really admire their pure "longevity insurance" design and believe middle-class retirees should have Sentinel-like income to supplement their Social Security. With the Labor Department and the Obama administration's recent interest in annuities, I wouldn't be surprised if this type of design -- fully portable and without required-minimum-distribution challenges -- becomes part of the line-up in 401(k), 403(b) and other qualified plans.
My main concern with Sentinel per se is the financial longevity and stability of a company issuing a 30-year-guarantee, otherwise known as their credit rating. And, although I don't want to give too much credibility to rating agencies that share in the blame for our recent financial crisis, I don't see any alter-native at this point. Asking Mom and Pop (or their busy financial advisor) to decode SEC Filings and NAIC ratings isn't operational. So, if Presidential Life's credit rating improves -- or perhaps if a bigger company buys them out -- I would score their Sentinel product higher. It achieves exactly what it sets out to do: very cheap lifetime income with no confusion or obfuscation.
Moshe A. Milevsky, Ph.D. is a professor at York University in Toronto, Executive Director of the non-profit IFID Centre at the Fields Institute and CEO of the QWeMA Group (www.qwema.ca). His latest book, entitled Your Money Milestones: a Guide to Making the 9 Most Important Financial Decisions in Your Life, was just published by FT/Pearson.