We would love to hear from you. Click on the ‘Contact Us’ link to the right and choose your favorite way to reach-out!

wscdsdc

media/speaking contact

Jamie Johnson

business contact

Victoria Peterson

Contact Us

855.ask.wink

Close [x]
pattern

Industry News

Categories

  • Industry Articles (21,155)
  • Industry Conferences (2)
  • Industry Job Openings (35)
  • Moore on the Market (414)
  • Negative Media (144)
  • Positive Media (73)
  • Sheryl's Articles (800)
  • Wink's Articles (353)
  • Wink's Inside Story (274)
  • Wink's Press Releases (123)
  • Blog Archives

  • March 2024
  • February 2024
  • January 2024
  • December 2023
  • November 2023
  • October 2023
  • September 2023
  • August 2023
  • July 2023
  • June 2023
  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • November 2010
  • October 2010
  • September 2010
  • August 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010
  • March 2010
  • February 2010
  • January 2010
  • December 2009
  • November 2009
  • October 2009
  • August 2009
  • June 2009
  • May 2009
  • April 2009
  • March 2009
  • November 2008
  • September 2008
  • May 2008
  • February 2008
  • August 2006
  • Are Longevity Annuities Ready For Prime Time?

    April 28, 2015 by Donald Jay Korn

    After getting a boost from a federal rule change last year, deferred income annuities have been gaining sharply in both assets and interest. Advisors should now understand what these products can do for clients — and what challenges they carry.

    The products are best understood in contrast with traditional immediate annuities, in which consumers give money to an insurer and receive a set amount of cash flow right away. (Read more on those on page 59.) With their deferred counterparts — known as deferred income annuities, or DIAs — consumers wait to receive payments in order to channel a larger income stream.

    As a subset of deferred income annuities, longevity annuities may provide a solution to clients worried about running short of money over an extended retirement. Longevity annuities typically don’t start payments until annuitants are in their 70s or 80s; the time from paying premiums to collecting cash flow might be 20 years or longer.

    There’s a good sample case on a calculator at immediateannuities.com, a site published by an annuity broker in Princeton, N.J.

    A 65-year-old couple might pay $100,000 now for a traditional joint life immediate annuity with a return-of-premium feature (which would give a beneficiary any difference between pay-ins and payouts). In return, they might get around $450 a month — $5,400 a year — if they start to receive payments right away.

    But with the deferred option, they could increase that payout to about $10,500 a year by waiting until 75 to start, or to more than $16,000 a year by delaying until age 80. Deferring until age 85 would increase that number further (and the payments could be even higher without the return-of-premium rider).

    The actual numbers will vary, but the concept remains: The longer the wait, the more cash clients can receive for the rest of their lives.

    “It’s comparable to waiting to start Social Security benefits in order to get larger monthly checks,” says Joe Franklin, an advisor in Hixson, Tenn.

    RULE CHANGES

    Until last year, longevity annuities and retirement accounts didn’t mix well. After age 70?½, seniors typically must take required minimum distributions; DIA values were included in the asset base, even though no cash flow would come for many years.

    Here’s how it worked: If a 72-year-old woman used $100,000 of her $400,000 IRA to buy a longevity annuity, her distributions would be based on that larger $400,000 balance, even though she had only $300,000 to draw upon.

    That made them a tough sell to clients who didn’t need the cash and were particularly tax-averse.
    But the IRS released final regulations last July for a type of longevity annuity known as a qualifying longevity annuity contract — or QLAC — which can be held in a retirement account, and isn’t subject to required minimum distributions.

    Under the new rules, if that same woman now uses $100,000 of her $400,000 IRA to buy one of those qualifying longevity annuities, her distributions would be based on the $300,000 remaining available, not the larger $400,000 balance. (Once the delayed payouts begin, of course, they’ll be fully taxable.)

    A longevity annuity must pass several tests to qualify as a QLAC.

    While it can offer a return of premiums to heirs, for example, there can’t be a liquidity feature — so the $100,000 that a client puts in will be beyond that client’s reach, other than through the annuity payouts.
    Purchases are capped at 25% of the retirement account’s balance or $125,000, whichever is smaller.

    And payouts must begin at no later than age 85. The payments “can start earlier than age 85,” says Ben Birken, an advisor at Woodward Financial Advisors in Chapel Hill, N.C. — but, he cautions, “the earlier you start, the lower your payout.”

    So do these annuities make sense for some clients? “I think using DIAs in IRAs and 401(k) accounts is an interesting concept,” Birken says. “A great deal of academic work suggests that annuitizing some portion of assets ends up leading to better financial outcomes.”

    CERTAIN RETURNS

    Franklin says advisors should now recommend them, particularly for those clients who want more certainty about retirement income at advanced ages.

    “We have set up deferred income annuities for some clients,” he says. Clients “tend to be very conservative, and they like the idea of a guaranteed increase in the payout by waiting a certain number of years. We’ve had conversations with some of those clients about getting higher income later, if they wait longer.”

    The products appeal to clients who want to minimize their RMDs, he adds: “Some of our clients do not like … paying tax on money they don’t need.”

    Longevity annuities might be good for those people, Franklin says, because they’ll be able to reduce current required distributions, delay taxable distributions from the annuity and perhaps leave more to beneficiaries.

    And unlike variable and indexed annuities, advisors say, these products are simpler and carry lower commissions. The latest report from LIMRA, through 2014, showed DIA sales jumped 22% from 2013. That said, the total was just $2.7 billion, while total annuity sales were $235.8 billion.

    TOUGH SELL?

    Yet there are some drawbacks to the new products. For one thing, Birken points out that it can be difficult to get clients to consider any immediate annuities, let alone deferred annuities, despite the academic studies pointing to better outcomes.

    “The idea of irrevocably shelling out a chunk of money is just hard for people to grasp,” Birken says. “Consider how hard it is to convince clients that delaying Social Security is in their long-term interest, if they are concerned about longevity risk.”

    What’s more, QLACs tend not to offer inflation adjustment riders, according to Birken. “The limited number that I’ve seen that offer inflation protection only do so once the annuitant actually starts receiving payments,” he notes — so such an annuity may not prove to be a sound investment if inflation “kicks up substantially” between the purchase and annuitization dates.

    Michael Kitces, partner and director of research at Pinnacle Advisory Group in Columbia, Md. (and a Financial Planning contributor), is also cautious on QLACs. “The expanded Treasury regulations had new requirements for these products, which required insurers to create them and get them through the state approval process,” he says. “The first QLAC contracts are only just now becoming available.”

    For now, however, his firm is not recommending them to clients — in part because their modest internal rates of return detract from their appeal.

    “The mere fact that they exist and are legally able to be purchased inside of a retirement account is not a reason to purchase them,” he says. “They need to be financially compelling to the retirement income picture. Given how current products are priced, there doesn’t appear to be a persuasive case yet.”

    Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.

    Originally Posted at InsuranceNewsNet on April 27, 2015 by Donald Jay Korn.

    Categories: Industry Articles
    currency