Income Distribution Future: Bundling Products, Riders

o Minimize risk.

o Provide guarantees.

To meet the need, investment professionals have been using “laddering.” That is, they set up fixed income investments with different maturity dates. This effectively spreads out a bond portfolio’s investment over the full interest rate cycle, thus providing the portfolio with some reinvestment risk protection.

Can this type of approach be useful if applied to satisfying the severe need for retirement income over a long period of time? Absolutely.

Let’s take an example:

The traditional approach: “Tom” has $400,000 saved for a retirement that is expected to last 30 years. A traditional solution probably seen in the past would be a recommendation to put the $400,000 into an investment portfolio with a blend of 60% equities, 40% bonds and a provision to withdraw no more than 4% annually ($1,333/month).

While that may sound conservative to the customer, there are no guarantees of principal, no income guarantees, and no elimination of investment risk.

The better approach: Use a combination of fixed annuities (immediate and deferred), held for 7-10 year periods with accumulation targets. This leads to a conservative approach with no investment risk, provides a level of guaranteed income, and includes principal protection.

As shown in the chart, during the first 7 years of payout, the monthly income, in both the guaranteed and the illustrated results, is guaranteed. This is because the SPIA, a 7-pay plan, is providing the income in these years.

Starting in the 8th year, the first indexed annuity is annuitized, providing income that continues for another 7 years. On a guaranteed basis, the monthly income is now lower than was the previous guaranteed income; however, the illustrated numbers are higher. Continuing on, the projected income (on an illustrated basis) is substantially higher.

Of course, this example only focuses on monthly payouts. But those companies that have added (or will be adding) LTC riders to their annuities will have another tremendous benefit to discuss with clients.

One thing is for sure: The strategies required to distribute wealth are inherently different than those used to accumulate wealth. Companies that understand this, and producers who embrace this strategic shift in thinking, will be wildly successful in 2007.