Economic and demographic shifts are making life insurance and annuities more attractive options to boost fixed income, financial advisors say.
“In a typical 60/40 portfolio, because bond returns are at a 50-year low, I’m seeing people moving funds from bonds to either life insurance or income annuities as a substitute,” said an insurance industry consultant in Arizona. As baby boomers enter retirement, Hegna is also observing a shift toward income annuities vs. traditional deferred annuities. In terms of product innovation, he noted:
● Deferred annuities are now adding withdrawal riders, which provide some liquidity flexibility.
● Some life insurance policies and annuities have begun adding long-term care coverage riders, which may allow income to double or triple to pay for certain types of care.
Annuities: Deferred vs. Fixed Income
Another recent development is the deferred income/longevity annuity, for which a client pays an upfront lump sum in exchange for monthly lifetime income at a future date, said actuary Scott Witt.
“These products are in the infant stage still,” said Witt. “There are some out there, but the market is not deep. This product is quite effective at addressing the risk of living too long,” he said. “It can help change the financial planning exercise from one with an uncertain endpoint to one with a goal of making it to age 85, or whenever the longevity annuity kicks in.”
In contrast are immediate fixed-income annuities, such as SPIA, single-premium immediate annuities, which provide fixed income to an individual or couple for their lifetimes or for a certain period of time. These can be used as supplemental income in times of shortfall or as a “bridge” for those who decide to retire before they claim Social Security or other retirement funds.
“This income bridge allows them to withdraw less from their investments early on and to maximize their future income,” she said. “It is also possible to add features to the SPIA to ensure there is a return of unused principle to a beneficiary or provide a cost-of-living adjustment annually.”
Life insurance: Not tied to markets
Cash value insurance, which is permanent life insurance, can also be used to boost fixed income. Whole life, variable life, and universal life insurance are examples of cash value life insurance. The two basic types of whole-life cash value insurance are described as:
● Premiums paid on a continuous basis: The cash value and death benefit grow at a certain percentage or higher as long as premiums are paid (versus term life where, when one stops paying, there is no accumulated cash.)
● “Limited pay”: The insured pays premiums for a limited number of years, but the cash value and death benefit continue to grow after payments stop.
Within the context of a financial plan, life insurance is an asset that’s not tied to the market,” one financial planner said. “So when the market is doing well, draw income from there. When the market’s not doing well, draw income from a guaranteed bucket of money which is the cash value of the policy,” he added. “This allows your market assets to grow.”
He also said this income can be taken every month or when the policyholder needs to draw from it and in many cases is tax-free as long as the insurance policy is in force. The cash balance could eventually be used up.
(Source: CNBC)