Good news on the regulatory front. Seriously.
For those of you who didn’t spend all summer sitting on the beach sipping fruity umbrella drinks, you’ve no doubt heard about what happened with longevity annuities. For those who didn’t, here’s the rundown.
The products, which act as “extreme” deferred annuities, are meant to safeguard against outliving one’s assets. Contracts are structured in a way so distributions begin at an advanced age, usually 80 or 85, and pay a specified amount for the remainder of the annuitant’s life. The investment grows in the account until distributions begin.
If a client purchases a longevity annuity in their 60s, the company then has 15 or 20 years to play with that money. Yes, we’re all living longer, but mortality tables still favor carriers, and there’s a good chance the client might die before distributions begin. At that point, heirs receive nothing, and the investment is forfeited. For all of these reasons, it’s a great deal for the company. Therefore, if the client does in fact live long enough to receive benefits, they end up being pretty generous.
For example, in 2009MetLife said a 60-year-old male who spent $50,000 on a longevity annuity would have a guaranteed annual payment of more than $56,000 a year when he turned 85. For a 60-year-old woman, the same payment would yield a lifetime annual guarantee of about $44,500. The amount is lower because women typically live longer than men.
Demographics are driving demand, with deferred income annuities in general, and longevity annuities in particular, expected to be the fastest growing annuity product in terms of sales on a percentage basis in 2014.
Those demographics, of course, have us all worried, and actuaries in particular fret about an aging population’s effect on the solvency of certain government programs, most notably Social Security and Medicare. It makes annuities, often the object of ire from skeptical regulators, increasingly important as a product class.
Hence the good news. Treasury Department rules released in July now allow the value of longevity annuities to be excluded from calculations of required minimum distributions (RMDs). The change is expected to result in increased access, and therefore increased demand, for the already popular products in 401(k) and IRAs.
The Insured Retirement Institute (IRI) reports that as recently as 2012, only six companies offered these types of products. In 2013, at least a dozen companies offered or filed to offer a DIA product, and the numbers continue to rise.
For those advisors and agents in the fixed-indexed and variable annuity spaces, there is no change, meaning their still locked out of tax-qualified retirement plans, or “qualifying longevity annuity contracts” (QLACs), as Treasury refers to them. Longevity annuities represent another way in to the retirement market, which means opportunity for those who recommend them.