Of all the misnomers that abound in the life and health insurance industry, perhaps the worst two relate to the two most basic productslife insurance and annuities.
Life insurance as we know it is not really a product designed for insuring living, but to insure for death. Likewise, life contingency annuities are really insurance against living too longi.e., “life” insurance!
The bulk of annuities being sold today are deferred annuities. They require the purchaser to transfer funds to the insurer in order to accumulate an amount for eventual distribution as periodic annuity payments.
No problem there. However, an even larger potential market exists for those with funds that already have accumulated and are continuing to accumulate in pension plans, stocks, bonds, bank accounts or mutual funds. These investors might like the ability to lock in current annuity purchase rates without the necessity to transfer investment funds to the insurer.
In the next 20 years, large numbers of people are expected to retirethe baby boomers. This generation has accumulated huge amounts of investment funds that are earmarked for use in retirement. However, the vast majority of the boomers pension plans do not provide for any type of pension payment that is guaranteed for the lifetime of the retiree. Moreover, none of their stocks, bonds, bank accounts or mutual funds can guarantee that the retiree will not outlive the funds available for retirementno matter how much money these accounts may hold.
Why not sell annuity guarantees without the accumulation feature? In essence, this would be a “term insurance” approach to retirement planning.
It is easy to envision an annuity product sold to employers, banks, mutual funds and stockbrokers that provides annuity purchase guarantees with respect to assets held in employer-sponsored pension plans, bank investment accounts, mutual fund accounts and brokerage accounts.
These types of products could help employees secure their retirements while also helping financial service organizations ensure the loyalty of their customers.
Why would anyone buy an annuity guarantee? In essence, deferred annuities provide two benefitsappreciation of accumulated contract values and guaranteed annuity purchase rates. While it is true than many deferred annuities (particularly variable annuities) offer an alphabet soup of additional features, it remains true that the main thrust of a deferred annuity are these two benefits.
While sales personnel over the past two decades may not have emphasized the feature of guaranteed annuity purchase rates, these rates are nevertheless key features of any deferred annuity contract. Thus, the industry has been selling, and its customers have been buying, guaranteed annuity purchase rates throughout the huge increase in annuity sales over the past 20 years.
Moreover, properly explained, guaranteed annuity purchase rates may well have great appeal when offered in connection with pension plans, bank accounts, mutual fund accounts and brokerage accounts.
The cost for providing the guarantees should be relatively low, since there should be little recordkeeping by the insurer. The employers, banks, mutual funds or brokers records would be the only record necessary to be kept.
For instance, an employer could inform employees that everyone covered by the companys 401(k) plan has the right to buy an annuity with all or any portion of his or her pension assets at the time of retirement at competitive, negotiated annuity purchase rates. The same principle would apply to participating banks, mutual funds and brokerage firms.
At the time of retirement, the retiree could be offered the choice of the type of annuity desiredvariable, fixed or a combination. It is even possible that the annuity could utilize the same investment mix chosen by the retiree prior to retirement.
It is not completely clear that the prohibitions against “investor control” under federal income tax laws apply to annuities that are in the payout mode. However, it is unlikely that the Internal Revenue Service would be much concerned, since the IRS would be collecting taxes on each years annuity payments and the program would not lend itself to playing the marketthe evil that the investor control doctrine seems intended to cure.
The advantages of this type of product should be obvious. Everyone wins! Retirees are guaranteed annuity payments for life; insurers are the recipients of large volumes of annuities in the distribution phase; employers, banks, mutual fund managers and stock brokerage firms can rest easy that they have avoided the potential liability resulting from employees or customers running out of retirement funds because of living too long.
The practical affect is to unbundle the annuity guarantee from the investment and accumulation elements of a deferred annuity.
We have a recurring nightmare. It is about an elderly retiree showing up at the provider of his/her IRA rollover from the original pension plan. The retiree is wondering why the “pension” check did not arrive that month. The provider (usually a bank) looks up the records and determines that it is because the retiree is deadaccording to the IRS annuity mortality tables used for distributions from the IRA, that is.
As we have written before, industry studies show that over half of all Americans will outlive the IRS annuity mortality tables. Large numbers of fellow citizens are in for a shock when they realizetoo latethat they needed guaranteed annuity purchase rates to secure their entire retirements. The product we suggest could well solve this problem.
Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are attorneys with the insurance law firm of Blazzard, Grodd & Hasenauer, P.C. They practice in the firms Pompano Beach, Florida, office. Their e-mail address is firstname.lastname@example.org.
Reproduced from National Underwriter Edition, December 3, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.