Concerns by insurance regulators, federal and state, regarding equity-indexed annuities certainly seem to have taken center stage over the past few months.
These issues have focused on deferred annuities.
It’s time to engage in serious discussion regarding solutions to pressing market needs relating to sound income-oriented products. Consumers at or near retirement age and the insurance companies that service their needs continue to look for useful and affordable solutions.
In this regard, equity-indexed product attributes are worthy of incorporation into retirement income offerings. And, while we are not attorneys and don’t offer tax advice, we believe the designs may avoid some of the controversial issues currently roiling the equity-indexed product segment of the industry.
Without going into a full-fledged discussion of retirement income product objectives, here are some critical objectives that an offering should appropriately address:
1. Consumers want an asset that is at least to some degree liquid.
2. Consumers want investments that will appreciate over time to cover increased costs.
3. Consumers want vehicles that provide protection against certain contingencies.
Equity-indexed immediate annuities can address these attributes very nicely.
For example, these offerings may be able to keep up with increased living costs. Although the link between items such as medical costs and investment-related returns is by no means perfectly correlated, an equity-indexed immediate annuity offers the potential for increased payments, either over time, or significantly immediately.
Thus, the design will be able to track, imperfectly perhaps, higher costs associated with retirement.
A new annuity vehicle linked to the stock market provides potential upside protection, with only a limited downside.
However, future designs now on the drawing board will guarantee that the payments will never be less than the guaranteed payment level. (The first payment would be at such guaranteed payment level.)
Clients may prefer such vehicles over single premium immediate variable annuities. While SPIVAs provide assurance that an annuitant can’t outlive his assets and they do provide upside potential, there is a real risk of downside performance if the return is less than the rate assumed in the determination of the purchase rate. Clients may opt to go with limited or no downside even if it means some caps on the upside.
How the product delivers the upside performance offers the ability for creative and useful innovation.
The application can be very immediate, in which case its dollar value would be considerable, especially in the early years, or it can be spread over a number of years. In the latter construct, higher returns would be used to increase the guaranteed payment level.
Other attractive options are also possible, so that consumers can maintain their initial level of income, provide for greatly increased early returns, or spread out the benefit of positive return over the product lifetime.
It is possible to add long term care protection to such an equity-indexed vehicle. In doing so, there would ultimately have to be some reflection in the product price of the cost of providing higher benefits earlier to a subset of the group of purchasers. Design flexibility, of course, exists.
Equity-indexed retirement vehicles add an important weapon to insurance company arsenals, providing upside return potential while avoiding the disadvantages of offerings whose value can fall.
Cary Lakenbach, FSA, MAAA, CLU, is president of Actuarial Strategies Inc., Bloomfield, Conn. E-mail him at firstname.lastname@example.org.