From Steve's Blog

Subscribe to Steve's Blog

Categories

Archive


A Summer Rambling


Posted By: Steven D. McDonnell | Posted On: Jul 03, 2014

Temperatures here in New York City have risen of late, as well as humidity, typical of our summers. Last evening we endured torrential rain with thunder and lightning and we’re being hit with the same tonight. Not too many people are on the streets.

Tomorrow we’re supposed to get more rain, however I think that plenty of people will still venture out to watch the World Cup at bars and restaurants in my neighborhood of Astoria, Queens.  There are many Columbians and Brazilians living here, which will make places carrying the telecast of tomorrow’s quarterfinal match abuzz with activity. Fans will be watching from the sidewalks as well, I’m sure.

While all this is going on I’ve slowed the pace of my regular work activities slightly, and figured that today I’d put up a fresh blog post – a long overdue one.

Prior to sitting down to write, I pored over recent articles from the web related to annuities and managed to find, as usual, a mix of positive and negative. For now, I’ll steer clear of the criticisms; perhaps I’ll address them another day.

A common topic among the optimistic articles was the deferred income annuity, which has, over the past few years, been the subject of much innovation, ranging from flexible annuity start dates, commutation rights and rising payments to combat inflation.

MassMutual recently added a convertible joint life annuity option to its RetireEase Choice DIA that will allow a spousal annuitant to convert to payments based on a single life if the other spouse dies before the annuity start date. If the conversion is made, the single-life payments will be increased compared to what would have been paid had the spouse not passed away so early on.  A caveat is that with this convertible option payments will generally be lower than on a non-convertible joint option. The conversion feature must be elected at contract issue and other conditions and restrictions will apply.

Another recent development with a link to DIAs is the Treasury Department on Tuesday issued new rules regarding the use of longevity annuities in 401(k) plans and IRAs1. Longevity annuities, also known as longevity insurance (I prefer the latter term) are essentially DIAs whose payments begin when the annuitant reaches an advanced age, such as 85. There is no payout prior to that age, nor a death benefit, but cutting such things out ensures a sturdy income stream to cover an unforeseen increase in life expectancy.

The new Treasury rules say longevity annuities in IRAs and Q plans won’t be subject to Required Minimum Distributions that would otherwise kick in at age 70½ (that is, before the start of payments under the longevity insurance).  Other provisions of the rules increased the amount that can be invested in these annuities and allowed for products to have a return-of-premium death benefit.

It seems to me that the steady improvement in DIA design is showing that the industry is making an effort to address long-standing objections to annuities (i.e., loss of control, no inflation indexing, no death benefit protection).

In fact I think advisors and investors are not fully aware of the latest in DIA improvements. I saw an article posted yesterday that endorsed the merits of both DIAs and SPIAs2.  However it was not 100% correct in that it said, without qualification: “money put into an annuity goes to the insurance company after you die.” Quite a few DIAs have death benefits if death occurs prior to the annuity date. The article also did not mention period-certain annuity options, which provide payments to beneficiaries if the annuitant dies early.

Because there are so many types of annuities, they defy blanket statements. They are also open to misinterpretation. That’s where insurers and their distribution partners can do more to educate the public and the media.

That process is certainly an ongoing one!

I wish all the readers a festive 4th of July holiday.

 

1” Longevity Annuity Regs Could Spark Chain Reaction,” by Linda Koco, published yesterday on insurancenewsnet.com.

2” Annuities are not always a bad thing,” by Artie Green, published yesterday in Los Altos Town Crier.