As I was Contemplating the content for this column on President’s Day 2010, I realized that one of the numerous product descriptions sitting on my desk was issued by no other than Presidential Life. How appropriate, I thought. So, for this episode of Annuity Analytics I would like to review a rather obscure product that has only recently become available for sale: Presidential Life’s Single Premium Deferred Benefit Annuity (SPDBA), which the company has christened the Sentinel.
Presidential Life doesn’t have a roster of annuity wholesalers prancing around the country in expensive suits, descending on your offices with lunch and cookies, which is why you might have no idea who they are. But as part of my mandate is to shine some light on companies and products that may not have million-dollar advertising budgets, here we go.
How Does it Work?
First, the facts: Presidential Life’s Sentinel is not a Variable Annuity with a Guaranteed Lifetime With-drawal Benefit (GLWB). In fact, it isn’t an investment-type annuity, or even a savings product. It is tech-nically classified as a fixed annuity. Moreover, once you hand over your initial money premium, the Sentinel has no cash surrender or accumulation value nor can it ever be converted back into cash, after the obligatory free-look period.
So, you ask, why in the world would anyone purchase this?
The answer is that Presidential Life’s Sentinel provides longevity insurance protection at its purest. Although you will not have access to the money once you give the insurance company your premium, just like with any other insurance-against-risk policy it protects you if something goes wrong or the unexpected happens to you. In this case, it protects you against living too long. Yes, that too is unexpected and can wreak havoc on your (or your client’s) plans. Elsewhere I have written about the benefits of an Advanced Life Delayed Annuity (ALDA) structure and the Sentinel falls in that category: It only pays off if and when you reach an advanced age.
Here is an example of how this product works. These numbers are generic and only relevant in mid-February 2010. So, keep in mind they may not reflect the pricing you get depending on your state and date of your quote. Here’s an example: As a 40-year-old purchaser, if I deposited $10,000 into Sen-tinel and requested a life-only payment with a 30-year delay, I would be entitled to $305 per month starting at age 70, for the rest of my life. So, if I end up living to age 100 I would get a total of $305 times 12 times 30 = $109,800 (ignoring the time value of money, of course). If I die one day — or 29 years — before reaching my 70th birthday, my family gets nothing. That is insurance pure and simple. I like the odds.
The table to the right provides a rough indication of payouts at other purchase ages and deferral periods. The actuarial arithmetic is rather simple: the younger you are when you buy a Sentinel (or any pure deferred annuity) and the longer your deferral period, the larger the eventual income. This three-factor relationship is a manifestation of discounting for both mortality and interest. If you want cost-of-living adjustments, refunds, joint life payments, certain periods and all the other wonderful things that come packaged with annuities (but dilute the embedded mortality credits), your guaranteed income will be lower. Remember that these payout numbers can change before you buy (but never after), so make sure to shop around when you get a quote.
Things I Like:
I have long been an advocate of stand-alone longevity insurance and its role. As I explained in the Sep-tember 2009 issue of Research, the optimal retirement portfolio should consist of three types of product “silos”: (i.) systematic withdrawal plans; (ii.) investments with downside protection; and (iii.) pure income annuities. The Sentinel is your pure income annuity and is therefore part of the retirement income nutritional pyramid. Think of the following analogy: According to nutritionists, we should all consume an average of 11 milligrams of zinc per day. That is the recommended daily intake to maximize health. Of course, too much zinc will kill you; but, as with zinc, we all need some longevity insurance in our life.
In addition to its longevity insurance benefits, on the non-qualified side this product would be entitled to tax-deferred growth, as well as more beneficial treatment of the lifetime income, as a fraction of that income would be considered return of premium and hence non-taxable. This tax treatment is the raison d’?tre of life annuities and I would be remiss if I didn’t mention that numerous other insurance carriers offer variants on this design; nothing unique here.