Annuity Living Benefits – Offering Flexibility When Its Needed Most

A recent article in the Wall Street Journal detailed how the AARP’s family and caregiving expert had been forced to declare personal bankruptcy in 2019 after more than a decade of caring for her mother, who had a stroke, and her father, who had Alzheimer's.? Her experience reinforces one of the greatest challenges American’s and their financial advisors face in planning for their retirement; namely the risks of how long they are going to live and how healthy they will be? Add in potential costs, both financial and emotional, related to caring for elderly relatives and the complexity of this expands exponentially.??

Although annuities have been traditionally used to either accumulate assets on a tax-deferred basis or provide a source of protected lifetime income that can’t be outlived, the living benefits found on modern indexed and variable annuities provide a variety of options with respect to income and liquidity that can utilized to address changing financial, life or health needs.??Unlike traditional immediate annuities that provided few options in the way of liquidity, these modern products can be highly adaptable to the unexpected shifts in financial priorities that older age can bring.

While Medicare generally doesn't pay for long-term care?(LTC) stays in a nursing home, it will cover some expenses hospital care, doctor services, and medical supplies while someone is in a nursing home.??While there are still a few carriers offering traditional morbidity based long-term care plans, the sharp retrenchment from this market by a host of major insurers despite the obvious demographic demand should be a stark warning of just how predictable older age health and related care costs can be.??A risk reinforced by the steep regulatory approved premium rate increases, in some cases more than 100%, that holders of existing LTC policies have seen because of the substantial adverse experience incurred on these policies by insurers.??LTC provider Genworth estimated the median annual cost of in-home care rose to $54,912 in 2020, an 18.5% increase from 2016.??Annual nursing home costs can be more double that, particularly in the latter years of life when care requirements may increase substantially.?

?The guaranteed minimum withdrawal benefit or GMWB is?an optional rider that can be added to many variable and indexed annuity contracts.??It can provide a steady stream of lifetime retirement income by allowing a policyholder the option to withdraw a specific percentage of funds, typically 4%-5% of the protected income base, each year, irrespective of market conditions or investment performance.??Even if the account value goes to zero, the lifetime income feature, which can be on a single or joint lives, is tied to the protected income base and remains the same.??Equally important, these contracts offer the flexibility to take a partial or lump-sum withdrawal.??While doing so would reduce the protected income payment, the liquidity feature of these contracts means they can help support the additional expenses that a change in health may entail.?

While there is no one product that can solve for the uncertainty and costs of older age health risks, annuity GMWB riders can supply both a source of protected lifetime income while at the same time providing liquidity to address changing financial requirements.??They can also be used in combination with other products such as traditional LTC policies or an Accelerated Death Benefit (ADB) rider on a life insurance policy.??The latter allows the owner under certain circumstances such as if the insured is critically ill,?chronically ill or needs long-term care to receive a portion of the death benefit in advance.??These funds can then be used toward medical or other expenses to help alleviate their financial burden.

Planning for longevity and older-age health in retirement is an extremely complex process that requires careful planning and the ability to adapt to circumstances that can evolve quickly.??The “good” news is we are all living longer; unfortunately, in all too many cases such as that experienced by the AARP’s expert, that can also be the “bad” news.

Colin Devine?– Colin is a Research Fellow for the Alliance for Lifetime Income, a nonprofit 501(c)(6) organization focused on helping educate Americans on the risk of outliving their savings so they can enjoy their retirement.??He is also a Senior Advisor to Health Catalyst Capital, a venture fund that invests in high-growth transformative InsurTech-enabled services businesses.??

Previously, Colin was a sell-side equity research and ratings analyst for almost twenty years.??During his 15-year tenure with Smith Barney/Citigroup he was on the Institutional Investor All-America Research Team for 14 straight years including 10 consecutive years where he held the #1/#2 ranking in the Life Insurance Equity Research category.??

Alliance for Lifetime Income?– The Alliance for Lifetime Income is a non-profit organization which educates consumers about the value and importance of protected lifetime income through annuities. Its vision is for a country where no American faces the prospect of running out of money in retirement, and that annuities can be an important part of the solution to our country’s retirement income crisis. By providing interactive tools, expert content, live events, and actionable industry-leading research, it helps consumers understand and plan for retirement income and support financial professionals’ efforts to educate their clients and communities about protected lifetime income.