The volatile investment markets have not dampened life insurers' willingness to take on longevity risk, which is the risk that annuitants outlive their life expectancy.
Consumers, on the other hand, consistently indicate that they are concerned about outliving their assets, and they welcome the availability of guaranteed lifetime income.
This seems like a perfect marriage, doesn't it?
The product that addresses this need most efficiently is the single premium immediate annuity, or SPIA. A SPIA contract maximizes the amount of lifetime income per dollar of premium, and is also tax-efficient.
Hurdles to selling more SPIAs have been well-documented. See box for the major ones.
All these hurdles have real truth to them, of course. But, for the first time in the history of the SPIA market, the last few years have seen material (and I believe, sustainable) growth in SPIA sales.
After many years of flat sales in the $4 billion to $5 billion range, SPIA sales in 2008 reached almost $7 billion. (Data from Beacon Research, Evanston, Ill.)
Has the industry finally reached the inflection point in SPIA sales that can result in rocketing production as favorable boomer demographics continue to play out?
The roadmap to lead the industry to higher SPIA sales requires product, distribution, and technology/service components.
On the product front, the future of SPIAs requires controlled liquidity. Especially in light of the pervasive fear among consumers today, it is unrealistic to expect that SPIA policyholders will give up all future access to their funds.
Attaching a period certain feature to a lifetime income product is helpful, but not sufficient.
For the benefit of the sales rep and the customer, pre-defined windows or conditions creating liquidity must exist. It is true that more liquidity will have the impact of reducing benefit payouts; however, the net impact is still a more attractive product to the end buyer.
Future SPIAs must also have some inflation-responsive component. While the sales technique of laddering SPIAs over time can result in increasing benefits that can respond to inflation (especially as interest rates increase), other alternatives do exist. Some contracts today provide for fixed percentage increases in benefit payouts, for instance, or for cost-of-living linked adjustments.
These designs can be effective in addressing inflation concerns, but there are still others.
