By Linda Koco
Contributing Editor, AnnuityNews

Products that provide guaranteed lifetime income have changed so much in the past six years that American Council of Life Insurers is now reminding people that “This isn’t your father’s annuity.”

The trade group made the point in a letter it recently submitted to the U.S. Senate Finance Committee as part of the committee’s inquiry into retirement security.

The letter provides a snapshot view of how annuities have changed in recent years so they can be used to meet lifetime income needs in several ways.

The Finance Committee had requested information on key features of defined benefit (DB) plans that can be incorporated into defined contribution (DC) plans.

The more traditional payout annuities — also called income annuities — can serve this purpose, the American Council of Life Insurers (ACLI) points out in its written response. These are the standard contracts that provide periodic payments, typically for life, commencing “immediately” after purchase.

The products have evolved

But traditional guaranteed lifetime income products have “evolved significantly” over the past decade in response to interests and concerns with traditional annuities, ACLI says.

The trade group cites longevity annuities or longevity insurance as one example. Also called deferred payout income annuities, the longevity products provide for payment on a delayed or deferred date past retirement, such as at age 85.

[Note: Current required minimum distribution (RMD) rules in employer plans and individual retirement accounts discourage use of longevity insurance, but ACLI says new legislation could fix that by excluding the longevity insurance premium amount when calculating an individual’s RMD.]

Other annuity innovations cited by ACLI include newer versions of income annuities. These products are now available not only with a single premium purchase but also incrementally on a periodic purchase basis (for instance, by monthly payroll deductions), the association says.

In addition, today’s annuities offer many features that enable consumers to customize the annuity’s income stream to individual needs. This is not a brand new development, but the features are ones that can facilitate income in retirement. Examples cited by ACLI include:

·         Options that provide survivor benefits and liquidity for emergencies.

·         Optional guaranteed living benefits in deferred accumulation annuities. These provide protection during the life of the owner against investment risk by guaranteeing a level of annuity payments and withdrawal amounts before annuitization, ACLI says.

·         Provisions that insure against premature death. Examples include annuities based on joint lives, annuities that refund the remaining premium and annuities with minimum payment period guarantees.

·         Inflation protection. Some annuities include some form of adjustment for inflation, ACLI says.

Annuitization

In its letter to the Finance Committee, ACLI says it believes most workers should annuitize “some” of their retirement savings to support their monthly expenses. But the association also cautions that “annuitizing all of one’s savings is not appropriate for most people.”

Right now, though, the issue is caught in an endless loop.

That’s because few retirees annuitize their DC benefits. (Likewise, few annuity owners annuitize their annuity assets; industry statistics put the overall annuitization rate from annuities at around 1 percent.) This is despite the fact that annuities have the capability of meeting the guaranteed income need.

ACLI acknowledges that questions keep circulating about this “annuity puzzle” in the benefits marketplace. However, the association predicts that education of both employers and employees about the value of guaranteed lifetime income will help to solve the puzzle.

The association also believes that reframing the thinking about using DC plan savings as a source of guaranteed lifetime income will help change attitudes. Consumers are receptive, the association indicates, noting that employees surveyed by ACLI in 2010 expressed interest in seeing how much guaranteed lifetime income they could obtain from their retirement plan savings.

Laws and regulations

What’s needed to improve the lifetime guaranteed income picture? New laws and regulations that would “create an incentive to use guaranteed lifetime income as part of an employee’s overall retirement income plan,” ACLI says.

Annuities would figure largely in those laws and regulations.

For instance, ACLI favors measures that would encourage workers to elect annuities. One example: The association is in favor of legislative proposals to require DC plan benefit statements to illustrate participant accumulations as monthly guaranteed lifetime income.

Other efforts that ACLI likes:

• Measures to modify 402(f) rollover notice requirements and the safe harbor notice so they would include information about guaranteed lifetime income.
• Initiatives that would enable retirees to elect to use a portion of their DC account to obtain guaranteed income for life via longevity insurance or partial annuitization.

In addition, ACLI believes the country needs new laws and regulations that would encourage employers to offer annuities.

One example is an ACLI-supported proposal that the Department of Labor should “revise and extend” a bulletin (Interpretive Bulletin 96-1) that now provides for guidance on investment education.

ACLI thinks the DOL bulletin should also mention guidance on providing education on lifetime income and other distribution options— both “in-plan” and outside the plan. This would help DC plan participants and beneficiaries make informed decisions regarding their distribution choices, the association contends.

Workers need more information on guaranteed lifetime income options and on the risks of outliving their savings, the ACLI letter concludes.

“Long-term retirement planning can be a daunting task for workers. Guaranteed lifetime income options can help ease that burden by providing workers with a ‘paycheck for life’ they can count on no matter how long they live.”

In the individual market, consumers are starting to vote with their dollars in favor of guaranteed lifetime income products, albeit gradually. Beacon Research points out that income annuity sales hit $2.3 billion in second quarter 2011 — nearly double the $1.2 billion Beacon recorded for income annuity sales in first quarter 2004. LIMRA comments that the second quarter 2011 results represent a record for these products, and a 5 percent increase compared to the same period in 2010.

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.

© Entire contents copyright 2011 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.