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 The possibility of running short is called longevity risk, and the
Obama administration last year established rules to foster a new
type of annuity, the Qualified Longevity Annuity Contract, that
would provide a steady monthly payment until you die.
QLACs are a variation on a broader product category called deferred
income annuities, which let buyers pay an initial premium or make a
series of scheduled payments and set a future date to start
receiving income. Deferred annuities are less expensive to buy than
immediate annuities, which start paying out monthly as soon as you
purchase them.
You can purchase the plans at or near your retirement age, typically
70, with payouts starting much later, usually at 80 or 85.
The advantage of these QLAC plans is that they provide some
guaranteed regular income until death, so they can supplement Social
Security. And the deferred feature allows you to generate much more
income per dollar invested.
For example, Principal Financial Group Inc, which introduced a QLAC
for individual retirement accounts in February, says an $80,000
policy purchased at age 70 will generate $12,840 annually for a man
and $11,490 for a woman at age 80. An immediate annuity would
provide $6,144 for the 70-year-old man and $5,748 for the woman,
according to Immediateannuities.com (http://bit.ly/1ARbSUv).
Despite the benefits, annuities have lagged in popularity. The White
House thought it could encourage more people to buy deferred
annuities if they could be purchased and held inside tax-deferred
IRAs and 401(k) plans.
The problem it had to fix was that required minimum distributions
mean that 401(k) and IRA participants must start taking withdrawals
at age 70-1/2, which conflicts with the later payout dates of
longevity annuities.
The new rules state that if a longevity annuity meets certain
requirements, the distribution requirement is waived on the contract
value (which cannot exceed $125,000 or 25 percent of the buyer's
account balance, whichever is less).
That not only makes a deferred annuity possible inside a
tax-deferred plan, it also can encourage their use for anyone
interested in reducing the total amount of savings subject to
mandatory distributions.
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Sixteen insurance companies are now selling QLAC variations, up from
just four in 2012. At Principal Financial, QLACs now account for
roughly 10 percent of all deferred annuities, with the average buyer
close to age 70, according to Sara Wiener, assistant vice president
of annuities.
Employer sponsors of 401(k) plans are showing more interest in
adding income options to their plans, but they have been slow to add
annuity options. Still, MetLife Inc is one insurance company testing
this market, with a 401(k) product introduced last month.
"If you go back 40 years to the time when defined contribution plans
were in their infancy, they were seen as companion savings plans to
pensions," says Roberta Rafaloff, MetLife vice president of
institutional income annuities.
"Plan sponsors didn’t think of them as a plan for generating income
streams until recently," she said. "Now they’re taking a much more
active interest in retirement income."
All this still constitutes a small part of a shrinking pie. Sales
for all annuity types have been falling in recent years due in part
to persistently low interest rates, which determine payouts.
"It’s going to take time for consumers to understand the value of
addressing longevity risk," says Todd Giesing, senior annuity
analyst at industry research and consulting group LIMRA. "But we’re
hearing from insurance companies that it’s creating a great deal of
conversation in the market."
(The writer is a Reuters columnist. The opinions expressed are his
own)
(Editing by Beth Pinsker and Lisa Von Ahn)
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