L&HA: There's a fair amount of fear associated with retirement. That should be good for annuity sales, right?
DP: The challenges retirement poses are a door-opener for agents to start a conversation with recently retired people or those approaching retirement. There are five categories where agents can help clients problem-solve: inflation, taxes, longevity, cost of health care, and uncertainty in their portfolios and income stream.
Agents should help their clients break down expenses or income needs into two categories: essential and discretionary, putting every expense into one of those categories. Then break income or asset sources -- pension plan, securities, 401k, IRA, taxable investments -- into corresponding categories. As you help your clients match current income sources with their essential and discretionary living expenses, you can identify any income gaps. For example, for essential living expenses such as household expenses, health insurance, and food, an agent needs to make sure clients have a guaranteed income source like their pension plan and Social Security that will cover.
L&HA: And if there's a gap?
DP: If there's a gap, clients will need another source of reliable, consistent, and protected income. You can help transition some other assets, lump sums in a 401k or IRA, for example, into a guaranteed income stream from an annuity. Then you can work with the client on more flexible, growth-oriented investments or annuity products to meet discretionary income needs, tailoring the risk tolerance of the different products.
L&HA: Seniors have seen economic cycles and political upheaval; they know conditions change. The resulting sense of uncertainty leaves them wanting guarantees and flexibility.
DP: Think of a lever or wheel that you dial. For some of your client's income needs there is absolutely no discussion. They want to know they have a guaranteed income stream of XX dollars per month for life. Then with some other assets they can take a little more risk, perhaps adding some inflationary protection on the essential income. For example, if they purchase a guaranteed living benefit on either a variable or indexed annuity their minimum level of guaranteed income would have to cover their essential income, but they would have some investments either directly invested in sub-accounts with equity exposure or in an indexed annuity where they are allocated to index accounts whose performance is somewhat tied to equity performance. You can help your clients dial their own level of predictability, control, and potential for upside.
L&HA: The Phoenix has been addressing consumers' concerns about longevity and long term care with new product features. Tell us about those.
DP: In the past consumers were afraid of not accumulating enough money. Now people who have accumulated a big or not-so-big pot of money fear outliving their assets. Longevity protection falls into two categories. One, the more prevalent type of benefit, is the guaranteed lifetime withdrawal benefit rider where you guarantee the client a stream of predictable income for their lifetime. The other type of longevity protection that's gaining popularity is more like deferred income, where the longevity-type benefit kicks in when the client reaches a certain age, often well into their 80s. Until that point they are getting longevity-type credits. They can segregate a certain portion of their assets to get income from them from ages 65 to 80, and then they have the longevity benefits kick in. Those are often referred to as deferred income annuities or deferred SPIAs.
L&HA: And the tools we have for long term care protection?
DP: Long term care protection is also coming in two different flavors. Often you will see a LTC-type benefit attached to a guaranteed lifetime withdrawal benefit rider. That will increase the guaranteed income amount available should the customer be confined to a nursing home or unable to perform two out of six activities of daily living. We call those confinement benefits combined with guaranteed living withdrawal benefit riders. Those are very common in the industry.
The other place we see LTC is a true qualified long term care rider added to a fixed annuity contract or even an indexed annuity. Similar to the living benefits with long term care, the true qualified long term care becomes tax-qualified long term care, and it give clients access to the money in their contract if they can't perform two out of six activities of daily living, and then an actual insurance component will take over once the account value is depleted and pay for some specified period of time.
L&HA: The latter option is a response to the Pension Protection Act of 2006. Has there been strong interest?
DP: Legislation became effective in January 2010 and clearly defined the concept of tax-qualified long term care. This is a way for clients to get the gains out of an annuity free of income taxes as long as they meet the qualifications under the Internal Revenue Code. There's a lot of discussion about it in the industry, but I have been surprised at the lack of product development activity and sales. I attribute that in part to the financial crisis. It's also a complex product to develop, and the agent has to be health-licensed. The industry needs to educate agents and consumers about the product benefits.
L&HA: The middle market - is that our target?
DP: At The Phoenix we are focused on the middle market. Tax-qualified LTC is prevalent in the middle market, but I think that feature will increasingly get more attention from upper middle market or high net worth individuals because they may have more gains in their annuity contracts.
L&HA: When you look back and ahead, what's most significant?
DP: I have seen the shift from accumulation to payout. My first couple years in the industry were spent developing income annuities. I thought they were some of the greatest products out there, but it was difficult to get any receptivity because people were afraid of tying up assets. With the financial crisis, pre-retirees and retirees now are open to giving up some liquidity to get a higher level of guaranteed income. A theme at the Retirement Income Industry (RIIA) conference in March is that we have the products to meet retirement needs, it's a matter of helping agents market the products and showing retirees how these products can benefit them. We need a shift from being product-centric. We have the products to tell the story, now let's put the book together.
