Why The Industry Should Re-Engineer Income Annuities

Some companies have provided liquidity by permitting commutation of remaining certain payments. Others now include flexibility to advance future scheduled payments on a limited basis, and a one-time window to "reprice" if interest rates, and presumably inflation, move higher. A few have introduced annual adjustments to income payments based on changes in the Consumer Price Index.

But these product changes are largely piecemeal attempts to fix a product design that is out of touch with boomer clients.

Start with clean slate

In contrast, it makes more sense to start with a clean slate by re-thinking the traditional income annuity with the generation of baby boomers in mind. The best way to accomplish this is by examining 2 important questions: What do retirees need and what do retirees want?

What retirees need: A significant amount (40%) of baby boomers and retirees are worried about running out of retirement income, according to a recent survey conducted by the Lincoln Retirement Institute. With the potential for retirement to last decades, keeping pace with inflation is equally important. A re-engineered annuity should help clients accomplish both objectives. For the portion of retirement income provided by a fixed immediate annuity, the retiree should enjoy the comfort that comes from knowing the risk is insured and shifted from the retiree to the insurance company.

What retirees want: This question gets at the heart of why retirees seldom use SPIAs. While the primary objective is lifetime income that keeps pace with inflation, seniors are understandably reluctant to relinquish control of such a large amount of money should unexpected needs arise.

If the insured solution removes access, it makes them feel less secure, not more.

A similar issue exists with the possibility of premature death. Many retirees believe that if they were to die shortly after retirement their beneficiaries would have been better served if the retiree had self-insured, thereby preserving most of the nest egg for the beneficiaries.

Fixed immediate annuities do provide alternatives to a pure "Life Only" payout, which limit the amount of forfeiture associated with premature death. But retirees often have had difficulty relating to the way such guarantees are packaged.

Therefore, to meet retirees' needs and wants, the new generation of traditional income annuities must guarantee lifetime income and lifetime protection of purchasing power, while providing access to money for unexpected needs and preserving the remainder of the money for the retiree's beneficiaries.

For the industry to succeed in the future, it is essential for products such as SPIAs to evolve to meet the complex needs of baby boomers.

C. Phil Elam, FSA, MAAA is an senior vice president and the individual fixed annuity business leader at Lincoln Financial Group, based in the Greensboro, N.C. office. To e-mail him, write to: [email protected].