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May 27, 2006 at 08:00 PM
Today’s economic needs and conditions are pushing for a more dynamic immediate annuity product.
A growing percentage of the population is already shifting from the accumulation to decumulation stages of life and considering multiple retirement product options. This is increasing demand for more consumer-friendly product solutions–ones that will transform the annuity market.
The life insurance industry is potentially the only source that can insure retirees against the risk of outliving assets. As such, it must either develop products that optimize appeal to retirees or remain stagnant. To do this, the immediate annuity products need to undergo a revolution.
What kind of immediate annuity would fit the bill? It must provide disclosure and flexibility.
Disclosure. Disclosure of product features is a key part of a possible product revolution. (See chart.) The key benefits of disclosure would be:
o Simple development of account value.
o Easy to produce and understand statements.
o Comparability of performance between the immediate annuity and other financial options.
Why are these disclosure elements so important? Conventional wisdom says consumers only seek products that maximize guaranteed payout from day one, and all else is irrelevant. But it’s unlikely that consumer research has ever been conducted that measures the value of full disclosure and flexibility.
Providing a fund value would give the customer a basis to measure the annuity’s returns, including interest and survivorship. If the customer needs to acquire additional guaranteed income, he or she could make an informed choice about the value of the contract versus alternate products. In some cases, other options within the contract may provide liquidity, so the disclosure could include that information as well.
A perceived disadvantage of the life annuity is the loss of the investment upon early death. Disclosing the credit–sometimes called a survivorship or mortality credit–that other survivors in the insurance pool receive would help enforce the financial advantage of using survivor financial assets to purchase the life annuity.
Consider the analogy of investing in common stock. When purchasing stock, investors expect to have an opportunity for greater return–with the risk of loss–than they would have if purchasing less risky investments. Similarly with the life annuity, annuitants would expect to realize additional guaranteed income as a result of the survival credit, with the potential for loss upon premature death.
Such disclosure would highlight how annuitants can optimize guaranteed income under a life annuity and would show the additional return attributable to the survival credit. While the life annuity is not an investment, the analogy explains the risk-reward relationship of the product.
