AAII Journal November 2014
What Is a Longevity Annuity?
by Stan Haithcock
The new kid on the block in the annuity world is the longevity annuity.
It was actually introduced in 2004, but it has just been in the past few years that this simplistic future income strategy has started to gain traction in the retirement income planning world. If you think you might need contractually guaranteed lifetime income that starts at a future date, then you need to know the details about this unique transfer-of-risk strategy.
Longevity annuities go by many names, and it seems like most financial journalists are confusing the issue with this lack of name uniformity. Longevity annuities have also been called:
• advanced delayed annuities,
• longevity insurance, and
• deferred income annuities (DIAs).
Regardless of which name is used, they are all the same simplistic future pension strategy that I predict will be the most popular type of annuity purchased within the next five years. Currently, the complex and high-agent-commission variable and indexed annuities represent the majority of annuities sold. The key word is “sold.”
Longevity annuities will lead the charge of consumers wanting simplistic and no-annual- fee designs with low agent commissions along with the ability to buy direct (which will also happen in the very near future).
That’s a pretty bold prediction for a product that currently represents less than 2% of all annuities sold, but I stand by this glimpse into the future because longevity annuities are so pro-consumer. At the end of the day, the customer always wins and always dictates product design and distribution. This evolution of the annuity industry is the next financial domino to fall.
There’s a lot of misinformation surrounding the longevity annuity product, so let’s take a look at how these future income strategies work and the ways they could possibly complement your portfolio.
Longevity Annuity Income Structures
If a longevity annuity had a first cousin, it would be a single-premium immediate annuity (SPIA). Just like an SPIA, a longevity annuity has no accumulation portion of the contract and is a pure transfer of risk that is designed to provide a guaranteed lifetime income stream. Longevity annuities and single-premium immediate annuities are pretty much structured the same way, with the primary difference being that SPIAs are for income now and longevity annuities are for income later.
There are many ways to structure the contractual payout of a longevity annuity, and you can customize the policy to meet your exact goals. Below are just a few ways to contractually structure the future income of a longevity annuity. Your agent and adviser should show you all of the options available and fully explain them so you can make an informed decision. The income structure choice is made at the time of application and cannot be changed after the policy is past the free-look period that is specific to each state. The free-look period is a provision that allows you to get out of a policy, within a specific time period, after the contract has been delivered.