Guaranteed lifetime income is increasingly important for retirees in a post-pension world. But the primary vehicle for guaranteed benefits–annuities–can be a hard sell for many investors. It seems that every other day an article panning annuities is published in the mainstream media; and regardless of whether these attacks are unwarranted or uninformed, they have a real effect on those who need the protection of lifetime income the most.
Enter Stand-Alone Living Benefits (SALB).
SALB offer a guaranteed stream of income without purchasing a traditional annuity. The product acts like an insurance policy on an investment account, with income benefits kicking in if the account is depleted during the insured’s lifetime. The product is sometimes referred to as a “hybrid annuity” product, although it is not an annuity in the traditional sense.
Here is how they work. The investor places assets in an investment account that is eligible for coverage by SALB. The SALB provide a 4 percent to 8 percent lifetime income guarantee, calculated over the Retirement Income Base–essentially the account value–in place when the SALB are purchased.
The lifetime income guarantee will then continue payments to the insured if the account is depleted to zero dollars and can no longer support the payments guaranteed under the contract. Benefits typically are not available until the insured reaches 65. Fees associated with SALB range from 75 to almost 200 basis points, in addition to advisory fees associated with the underlying account.
For example, if an investor purchases SALB on an account with a Retirement Income Base of $500,000 and a 5 percent guarantee, the SALB promises that payments of 5 percent of the $500,000 base, or $25,000, will be available annually for the insured’s lifetime, starting at 65. Then, if the account value drops to zero, the SALB will continue to make those $25,000 annual payments for the insured’s lifetime.
Guaranteed income can increase annually if the value of the account increases, giving clients access to market upswings while still protecting them from downturns. For example, 5 percent SALB on an account worth $500,000 would pay $25,000 per year, but if the account value jumps to $600,000, the guarantee will jump to $30,000 per year.
A spousal option may also be elected that will continue payments over the surviving spouse’s lifetime.
A lifetime payment option is available on some products. Under that option, the investor’s account is liquidated and the proceeds are applied to purchase a fixed immediate annuity from the company. Payments under the annuity cannot be less than those that would be available by multiplying the proceeds of the account by the return promised under the SALB.