A low-interest-rate environment is a challenge but bodes well for purchasers of annuities.
Longevity has always been an opportunity for insurance companies to provide customer solutions through products and services. And in recent years, the longevity space has continued to expand, with changes in later age mortality, socioeconomic divergence in longevity, a shifting landscape from defined benefit protection, and increasing strain on Medicare and Social Security.
What do we need to know about the factors that have given rise to the current landscape?Â
That was the subject of TheStreet’s webinar:Â The Longevity Economy. The discussion was sponsored by Athene.
Meet the Panelists:
The Current State of Affairs
According to Downing, the historically low-interest-rate environment is one major factor. â€œWhat we’ve seen in the industry is a secular decline in interest rates and that decline has been going on for 30-plus years,â€ said Downing. â€œAnd even in recent years, each year we think rates can’t really get any lower, and yet they still find a way to continue to get lower.â€
And what that means, said Downing, is this: â€œTo have the same level of income protection in a really low rate environment, people need to save that much more. They need a bigger pot of money to really provide for that same level of income protection. So, that’s one challenge.â€
According to research conducted by CANNEX, Tolland said financial professionals regard annuities as attractive given the historically low-interest-rate environment.
For his part, Pfau said consumers might think itâ€™s a bad time to consider annuities when interest rates are low. â€œBut really the opposite’s true,â€ he said. â€œThe cost of retirement grows as interest rates decline, and if you’re trying to fund retirement through an investment strategy, that cost can grow faster than the cost of funding it through an annuity that includes that risk building for that longevity protection. So, actually, the case does become stronger in a low-interest rates environment and it’s encouraging to hear that people do recognize that.â€
Another challenge has to do with the shift from employers providing employees defined benefit pension plans to 401(k) plans. â€œAnd what that’s done is that’s really shifted the accountability on managing longevity from the company or other provider to the person that needs to actually manage that,â€ he said.
And these employees, said Downing, are â€œgood at their craft, but they’re not necessarily skilled in terms of how to manage assets for a lifetime.â€
Another factor at play is what Downing described as differentiated mortality thatâ€™s largely socioeconomic driven People are living longer but â€œindividuals need to plan for a really uncertain length of protection. Individuals may live to 80, or 90, or 100 and finding protection for an â€œuncertain level of need is challenging and can be expensive and it’s hard to manage around like that,â€ he said.
So when you look at the overall environment, said Downing, there’s just a greater amount of assets that are effectively unprotected and individuals are at risk of managing those assets for their lifetime and potentially running out of money.
Here’s How Consumers and Financial Advisers Are Responding
So, how are consumers and financial advisers responding to the current state of affairs?
According to Downing, the current state of affairs has led to increased interest in fixed index annuities or FIAs as well as registered index-linked annuities or RILAs.
According to Athene, â€œwith fixed indexed annuities, the interest rate on a portion of your premium is tied, in part, to a published stock market index, giving you the opportunity to benefit from market trends without owning stocks. Your principal is protected from loss due to market downturns. Athene fixed indexed annuities may also include or offer optional riders that can be purchased for a charge. Rider features vary by product, and can offer benefits like lifetime income, increased liquidity, or a death benefit option.â€
For his part, Downing said FIAs provide â€œa lot optionality.â€ FIAs provide both liquidity and lifetime income benefits. And that’s why sales of FIAs have proven more successful as compared to single premium immediate annuities or SPIAs.
The same is true for RILAs, which according to Athene, provide exposure to a published stock market index along with a level of protection from market loss. Because the consumer assumes some of the risks of loss from market downturns, a RILA may allow for greater growth potential than other Athene annuities.
Whatâ€™s more, these products can be matched across the risk profile spectrum. â€œI think in a low, protracted low-rate environment, it becomes a really interesting tool in the tool kit to provide a component of just overall retirement savings and planning,â€ he said.
According to Downing, having â€œoptionalityâ€ helps individuals save more for retirement and protect their retirement needs over the course of their lifetime from a pure financial theory standpoint. I think that’s one reason why these products have been quite popular,â€ he said. â€œIt provides that flexibility for what is really a wide variety, especially at advanced ages, of life expectancy. Am I going to live one more year, five more years? It’s hard to protect against that in advance. It’s a lot easier to make that decision on the spot and if you’ve already bought that protection 20 or 30 years ago, it’s a lot easier to be able to make that decision as to whether utilize that protection when you need it.â€
For her part, Tolland said FIAs and RILAs are gaining acceptance in large part because of the concrete dollar value associated with these products during both the accumulation and decumulation phases. â€œYes, you’re paying a price for the optionality, but you’re also getting something that you can’t get elsewhere particularly in that package,â€ she said.
Bundled products can also be useful as an individualâ€™s needs change, especially with respect to funding health care costs in retirement, said Downing.
Pfau, meanwhile, suggested that owning an annuity provides individuals with the ability to have guaranteed lifetime income and worry less about outliving oneâ€™s assets.
Another benefit associated with annuities has to do with something called mortality credits, according to Pfau. â€œThe annuity offers a source of spending that investments can’t provide and that’s this idea of mortality credit; that those who don’t live as long and therefore don’t need as much to fund their retirement spending help to subsidize those who do live longer and therefore do need more to cover their retirement spending,â€ he said. â€œAnd that, for those who do end up living longer, that risk pool, that subsidy can really be quite competitive with the stock market and it can be difficult for stocks to outperform that and that’s in a simple income annuity.â€
And the benefits are even greater with the hybrid-type products such as an FIA or RILA, said Pfau.
For her part, Tolland said individuals should consider that there are many different annuities available, and â€œjust because you start in one place, doesn’t mean you have to end up there.â€
In some cases, a 1035 exchange – switching from one annuity to another – might make sense, said Tolland. â€œAs you transition through your own life cycle and in your retirement, you may have different concerns than you had before, so it’s not like these things are set in stone and you can never change that decision,â€ she said. â€œSo I think that’s an important thing to bear in mind.â€
Pfau also noted that annuities provide tax deferral in ways that a taxable brokerage account that produces interest income, dividends, and capital gains can not. Plus, individuals might consider annuities as an alternative to bonds because of principal protection.
The panelists also highlighted the need to work with a strong insurer. â€œThat’s absolutely important,â€ said Pfau. â€œYou want to avoid the possibility of running into a situation where you pick an insurer that may not be viable over the long term.â€
Downing, for his part, agreed: â€œIt’s imperative and it’s an important part of the decision that a customer should make is the quality of the insurer.â€
Thereâ€™s going to be a lot of product innovation and a lot of new solutions that will be coming to customers for years to come, said Downing. â€œSo, watch this space,â€ he said.
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