The rallying cry of the boomer generation continues to be “we want guarantees.” But is there something else in the air? For instance, are the growing concerns about the economy creating demand for more varied or targeted guarantees? And, what actions has the annuity industry taken?
A short history of products may provide some insights–or more questions.
Thus far, the insurance industry’s offerings with the greatest visibility are traditional VAs with optional features providing guaranteed withdrawal, accumulation and income benefits, shorthanded as guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits and guaranteed minimum income benefits.
These optional benefits tightly bundle investment and insurance and come in a variety of forms, explicitly addressing the quest for guarantees. The variations also implicitly and explicitly address differing subjects and durations for the guarantees: withdrawals, accumulation, specified periods, for life and dual lives.
The “for life” guarantees generally provide for benefit payments under 2 investment circumstances: when the VA owner is in the money and when the owner is out of the money. These may be said to be serving investors who have 2 active guarantee goals: a guarantee of near term payouts, and a guarantee of continuing payouts when the VA owner is out of the money for having lived too long.
The majority of the optional benefits now are designed to “hedge” those dual concerns. But are new design variations emerging?
In addition to offering traditional VAs, where guaranteed benefits are linked to assets held under the contract, there is an emerging development of what may be called “new age variable annuities.”
These new age products are technically fixed annuities; they are guaranteed payout contracts where the assets linked to and supporting the guarantees are not underlying funds. The guarantees are part of a package where the owners’ investments may measure the scope, size, duration and sustainability of the guarantees.
To date, 4 of these new age products–which have been assigned the questionable label of “synthetic annuities”–have been registered with the Securities and Exchange Commission. They are registered as fixed annuities that are securities. To date, the SEC has not declared them effective.
Meanwhile, the industry appears to have determined that there are some boomers whose primary, maybe sole, focus is on living too long. To address that concern, some insurers have been developing so-called “longevity” products; these are fixed annuities that pay a high level of lifetime income, but only to those who reach an advanced age (such as 85).
It is uncertain to what extent this unbundling of investment and insurance reflects boomer or industry perception of the economy. But it does raise some interesting questions. For instance, will the infamous critical 5 years before and after retirement, viewed against economic uncertainties, further propel this “survivors” product? Will this turn into a new type of reality show?
A key element of the payout under the longevity contracts is the mortality credits that arise when an owner dies before the annuity commencement age. In effect, if only about 1 in 3 owners survives to the stipulated annuity commencement age, then each survivor will be receiving a payout based on her own premium payments and the premium payments of the 2 other purchasers who did not survive to the annuity commencement date.
The downside is that the payout level for the “survivors” is not supportable if the annuity did not exclude other forms of payout, such as cash surrender value or a death benefit. In the absence of such exclusions, there could be adverse selection that would diminish the mortality credits that are necessary to support the payout for those who reach the payout age.
From the insurers’ perspective, this is unbundled insurance with the traditional necessary pooling of insurance risk. From the owners’ perspective, this is the guarantee of the only form of payout they may care about with limited investment risk.
From a regulator’s point of view, the Connecticut Department of Insurance issued a bulletin stipulating that the required disclosure on longevity products must focus on the absence of any death benefit. In that regard, however, it is surprising that the bulletin makes no reference to the total absence of any lifetime liquidity provisions for the purchaser of an annuity that is usually a “liquidity” product.
As to what comes next, this year–before the 2009 start of the boomers’ full emergence–should provide the answers.
Joan E. Boros, Esq., is of counsel with Jorden Burt LLP, Washington, D.C. Her e-mail address is JEB@jordenusa.com.