Does Your Retirement Planning Client Need an Endowment?

The former head of a major annuity issuer has an idea for life insurers: Rise above the individual fixed indexed annuity market fray by bringing an old retail product out of the attic.

Bob MacDonald, who founded and ran LifeUSA from 1987 through 1999, and who was CEO of Allianz Life of North America from 1999 through 2002, says the current fixed indexed annuity market is too complicated and too expensive.

Issuers could escape from annuity product problems by resurrecting the endowment contract and using it as the basis for a new type of guaranteed income endowment (GIE) contract MacDonald writes in a recent blog article.

“The GIE would be introduced to the consumer as a true alternative to existing fixed annuity products,” MacDonald says. “A product with more simplicity, flexibility and consumer control, but with the same protections against running out of money and income in retirement.”

What It Means

If clients used endowments to establish streams of retirement income, you could point to Harvard University, and its $51 billion endowment, as a role model.

Annuities and Endowments

The kind of annuity that a life insurer sells to an individual consumer today in the United States is an insurance contract that converts a consumer’s premium payment (or payments) into a series of one or more income payments, according to the National Association of Insurance Commissioners.

The NAIC defines an endowment contract as a form of insurance that pays one benefit amount if the insured dies while the contract is in effect, and the same benefit if the insured survives to the end of a specified period of time, or if the insured lives to a specified age.

Today, clients hear about institutional endowments in connection with efforts by universities and other nonprofit institutions to provide long-term financial support for student scholarships, or for extra income payments for top professors.

In the past, in the United States, parents used individual endowment contracts to save money for college expenses, MacDonald notes.

Sales of traditional endowment contracts fell sharply in 1984 when a change in the tax rules imposed federal income taxes on the buildup of assets inside new endowment contracts.

The GIE

MacDonald, who has worked as a consultant since he left Allianz Life, and who has been described as one of the architects of the modern retail annuity industry, says the new GIE could be a non-commissioned product that would exist in a parallel income planning product universe alongside the fixed indexed annuity.

A client would pay for the endowment contract with one premium payment. The contract could mature at the end of a term that might range from two years to three years.

The client could withdraw the premium payment at any time.

If the client left the cash in the endowment until the end of the term, the insurer would pay a specified amount of interest.

An endowment could, for example, turn a $95,500 premium payment into $100,000 in cash at the end of a three-year term.

At the end of the term, the client could take the cash out, roll the cash into a new GIE contract or convert the endowment into a stream of monthly income for a fixed term, ranging from a period of 10 to 30 years.

The insurer could add a bonus, such as 15% of the endowment amount, to the amount to be paid out.

For the client, “the product is easier to understand than the current crop of annuity products,” MacDonald says.

For the insurer, he says, a GIE contract would be easier to explain and sell, and it would involve no exposure to mortality or longevity risk.

“All liabilities are known and fixed,” he says. “With known liabilities, it’s easier for the company to match and manage investment durations.”

Agents and Advisors

A shift to MacDonald’s proposed GIE policy world might be better for fee-based RIAs than for traditional commission-based life insurance agents and brokers, because he is suggesting that the simple design would help insurers sell GIEs directly to consumers.

“As a result, companies can significantly reduce acquisition, marketing, administration and sales costs,” MacDonald concludes.

(Photo: Bloomberg)