The Department of the Treasury and the Internal Revenue Service released new guidance that is “designed to expand the use of income annuities in 401(k) plans.”
Guaranteed Lifetime Income Benefits, or GLIB (also known as Guaranteed Lifetime Withdrawal Benefits, or GLWB), provide both practical and emotional benefits in retirement by providing a lifetime income stream that the Owner cannot outlive, while providing retained access to the Owners Account Value, thus they are increasingly popular, especially with “boomers” preparing for retirement within a few years. In this fourth article discussing both the technical and sales positioning of GLIB, we examine issues the annuity professional should consider when recommending a specific GLIB from the standpoint of the dollar value of the lifetime income stream.
As detailed in the first article in this series, the actual dollar value of the lifetime income stream produced by a GLIB is determined by the growth of the Income Base Value, and the associated Income Benefit Factor applied to the Income Base Value when the benefit is triggered. As a general rule, in most GLIB, the age-associated Factors increase with the attained age of the Owner; some carriers increase the Factor at every attained age, whereas others increase the Factor in banded age groups. The increase in the Factor as attained age increases is, of course, reflective of the reduced life expectancy of the Owner. Regardless of the method, it is the combination of both the method used to grow the Income Base and the age-associated Factor that determine the amount the lifetime income withdrawal, thus, one cannot evaluate a GLIB on either of these components alone, it is the combination of the components that determines the ultimate dollar amount of the lifetime income withdrawal.
The dollar amount of the lifetime income withdrawal (relative to the premium paid) is the primary basis upon which many annuity professionals base their recommendations to the client; they are rightly seeking the most income that can be guaranteed for their client. However, this Author submits that this should in no case be the only basis upon which to make this determination as to which GLIB “is best;” there are other important factors that must also be considered for the long-term benefit of the client, and to ensure that over the clients’ retirement lifetime, that the GLIB will deliver its promised benefits:
This is neither accident nor coincidence; it is based upon generally accepted actuarial principals and methods. As analogy, think of the world of business accounting for publicly held companies; there are a variety of different methods they use to keep their books and track their results, but the only method that ultimately matters is referred to as “GAAP”, or “Generally Accepted Accounting Principles.” These GAAP principals are based upon years of what professionally trained and experienced accountants over time agree upon. While the GAAP analogy does not directly translate to the actuarial process in insurance, it does in principal. That is, the vast majority of insurance Actuaries (by the way, perhaps the most difficult certification to achieve in the math/statistical professional world) agree upon certain acceptable methods and principals in interpreting statistics about mortality, potential policy lapse, long-term achievable rates of return, commission, etc., and using those interpretations and assumptions to determine sustainable insurance benefits, thus the relatively “tight range” of the vast majority of GLIB lifetime income payouts that are available.
OK, you might ask, what’s the point? Simply this: there are GLIB benefits available that promise to deliver GLIB withdrawal dollar amounts that are far higher than the normal range, so much so that other actuaries and experienced insurance executives cannot fathom how they can be achieved and sustained while still maintaining the financial health of the insurance company. In evaluating the suitability of basing a client’s retirement income security upon these, this Author submits that the annuity professional should consider how an insurance carrier can promise so much more than other carriers can, particularly as the financial market components that support annuity benefits, all the insurance companies “play in the same sandbox.” The bond and equity options markets are (largely) public, global markets; any “big player” (as are insurance carriers) pretty much gets the same “price” relative to large volume of trades they are placing to generate general account returns.
Therefore, if the insurance benefit provided by “Company A” is significantly larger than that of “Companies B though Z,” the insurance professional must consider both “why and how.” Are their money managers really that much better than all the others? Perhaps, but it does not seem likely. Are their money managers taking more risk than the others? Let’s hope not. Do they have access to mortality and other actuarial assumptions that others don’t? Perhaps, but again it seems unlikely. Are their actuarial teams just smarter than all the other actuarial teams out there? Perhaps, but unlikely. Are their actuarial teams making assumptions about lapse and other factors that are outside generally accepted practices? Perhaps. Are they just willing to lose money? Only they know.
The bottom line: The annuity business is highly competitive. If these “out there” benefit levels are achievable using generally acceptable practices, does it not seem likely that other carrier benefits would be similar.
Closing thought. As with all the articles in this series on GLIB, this Author is not presuming to tell any annuity professional what they should be selling, the intent is to bring to light important points of consideration for the agent. Ultimately, you must rely upon your own judgment, as it is your signature on the application, your client, and your practice.
Jonathan C. Illig, Executive Sales Consultant at Brokers Alliance, is an 18-year veteran in annuity sales and support. Jon may be reached at Jonathan.Illig@BrokersAlliance.com.
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