What will be the cutting edge product of 2007? Rather than a particular product or rider, the real excitement will be bundling different products and riders and developing a process for income distribution.
Every insurance company seems to be targeting this huge market niche.
And why not? The first wave of baby boomers just turned 60, and retirement, at least a partial one, is on their minds. Add the fact that the Pension Protection Act of 2006 endorses long term care riders on annuities, and the real excitement next year will be in the annuity arena as it relates to income distribution planning.
The industry has done a great job in helping clients accumulate assets. But the biggest problem clients will have in the future is getting distributions, and increasing ones at that, from those assets.
Consider the following challenges facing clients today:
o Less than 20% have defined benefit pension plans. That is down from over 40% in 1990 (as per the Bureau of Labor Statistics).
o Health care costs, as a percentage of Social Security benefits, are at 20%, but they are projected to be over 50% by 2026 (as per U.S. Rep. Pete Stark; and the Centers for Medicare and Medicaid Services, Office of Actuary).
o New retirees may spend 30+ years in retirement, much longer than previous generations, according to most demographers.
o The rule of thumb is that inflation doubles retirement needs over 30 years.
o How reliable is the income they hope to generate?
Certainly the industry has developed a multitude of products across the spectrum, from fixed to indexed to variable, but there really is no one product that can:
o Create a strategy to provide long-term, inflation-adjusted income.
o Create pools of money designed to be held for specific periods of time.
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.