Consumers approaching retirement today are more vulnerable than ever. Lower fixed rates, at times dramatic market volatility, longer life expectancies and soaring health care costs all threaten their financial well-being. Add in the growing concern about Social Security and the fact that fewer people have traditional pensions, and you can see why finding solutions to retirement challenges may be one of the most valuable services an agent can offer a client.
Agents look to insurance carriers for at least some of these solutions, and yet the carriers are finding themselves constrained by many of these same market and environmental pressures. How can they meet client demands and address this multitude of retirement risks while meeting their own risk control standards?
As is always the case, necessity is the mother of invention, and insurance carriers are finding ways to turn these challenges into opportunities. They are applying insurance risk management to offer creative solutions, typically in annuities. The result has been a notable shift from guaranteed accumulation to guaranteed protection, and a wave of innovative products that include such features as chronic care riders, legacy protection, combination benefits, RMD-friendly withdrawals, GLWBs and guaranteed return of premium riders. These features are resonating with consumers, because they account for the market realities of the recent past and foreseeable future.
See also: Top 5 trends in annuities
The forces driving change
We all know the basic demographic forces that started the changes in retirement planning — baby boomers approaching and entering retirement in massive numbers and living longer than any past generation. And, we all have witnessed the market forces that are further shaping client needs and the products to meet them, from fickle markets to low fixed rates to rising health care costs.
What is the current mindset of boomers? First and foremost, when they think of retirement, they think of their 401(k) or IRA. Many don’t have a pension to depend on, and they are concerned about Social Security. They know they will spend more years in retirement than their parents, and they could face astronomical health care expenses. So, the starting point for a sound retirement plan most likely lies in what to do with the assets in that 401(k) or IRA.
In fact, the rollover market is booming. LIMRA projects the IRA rollover market will reach nearly $600 billion in 2016. Many of the people who hold these assets need guidance and product solutions.
The main issue is that 78 percent of rollover assets are in the market, in stocks and/or bonds. They are not protected, and they are exposed to volatility that is no longer the friend it once could be during the early accumulation years. Aside from the obvious market risks, these assets are vulnerable to others, including longevity risk, income risk, investor behavior risk, policy risk and the impact of bad health. Boomers already have had the pool drained on them two times with devastating results, and some may not have the wherewithal to handle another downturn.
Most of the other rollover assets (14 percent of them) sit in savings accounts and money market funds, earning close to zero. It is very unlikely that the higher yielding, lower risk investment options retirees used to enjoy will return any time soon.
As they near retirement, most clients know their money cannot stay where it has been during their accumulation years. They also know they need to take some market risk off the table and get some protection against the other risks I cited earlier. They need an answer to the fundamental question of how to make their money last and protect themselves from major drains such as health care.
Recent studies suggest that the standard 4 percent rule no longer applies, and that investors who take 4 percent out of their account each year may indeed run out of money. Many clients also need guidance on how to handle Required Minimum Distributions (RMDs), which don’t necessarily align with a smart income strategy.
Clearly, standard operating procedure no longer applies for retirement planning clients, so it follows that insurance carriers also have to write a new playbook.
The resulting changes
I said at the start that necessity is the mother of invention, and insurance carriers have two necessities. The first is to meet very different client demands, and the second is to do it in a low interest rate environment. These prolonged low rates have forced a pull-back of products that offer certain benefits that are no longer sustainable.
As a result, annuity products have shifted from a primary accumulation focus to a multi-faceted protection focus, covering both income and a wide variety of other retirement needs and risks.
One of the most common features is the Guaranteed Lifetime Withdrawal Benefit (GLWB) rider, which provides a guaranteed stream of income for life, often along with enhancements to maximize the benefit amount the client receives. And many of the newer RMD-friendly riders allow clients to take withdrawals for RMDs without impacting the annuity’s guarantees and income-boosting features. Other solutions include options that go beyond income, offering amplified benefits for chronic care, should clients need it, and enhanced death benefits to leave a legacy for family members. Carriers are also getting creative with versatile and efficient products, packaging income, chronic care and/or legacy protection features together. Lastly, some riders ensure value-oriented clients get their money’s worth, with a guaranteed return of premium via product benefits.
Agents today have an unprecedented opportunity to meet their clients’ retirement planning objectives by leveraging the multi-dimensional nature of many annuity products now in the market. Because of the uncertainty they face, clients are demanding protection and guarantees, and carriers are responding to this demand as well as their own risk management pressures with a wide variety of innovative products, features and riders.
Carriers are also offering agents access to better planning tools designed to help identify concerns and illustrate modeled solutions based on specific client needs. Using these newer tools, agents can help their clients zero in on their greatest vulnerabilities and address them before they become major financial missteps.
Insurance carriers have always had one main function: to protect against risk, whether it is damage to an automobile or home, the financial burdens of a family’s health care or income loss from premature death. With the latest innovations in the annuity marketplace, carriers are now offering insurance protection against another risk — financial failure in retirement. It is protection invented out of necessity that provides an opportunity for agents and clients to find retirement solutions that match today’s market realities.