Using An Annuity To Address The Longevity Issue In Retirement

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With nest eggs collapsing and one in three baby boomers expected to reach 90, running out of money in retirement is a major concern among retirees.  A reverse mortgage might be a perfect fit for some but other new products are starting to emerge as well. 

In Annuity Addresses Longevity Issue, WSJ writer Anne Tergensen describes how a relatively new type of annuity called a longevity policy allows you to convert a payment into a stream of income for life.  It differs from typical annuities that payout immediately, these don’t kick in for years. 

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For example, a 65-year-old man who puts $100,000 into a longevity policy today with MetLife could receive $83,600 a year from age 85 on. That’s about 10 times what he would get with a conventional income annuity.

One big advantage: Annual withdrawals of 4%, or even a bit more, from a nest egg today are less risky when there’s a guaranteed safety net 20 or 25 years down the road. "It’s a lot easier to plan to make your assets last until these payments begin than it is to figure out how to stretch them for the rest of your life," says Jason Scott, managing director of the Retiree Research Center at Financial Engines, a Palo Alto, Calif., company that manages 401(k) accounts.

Part of the negative on these types of products is that if the person dies prior to the payments kicking in, they forfeit the money.  According to the article, only a handful of insurers are offering these products, including MetLife and Hartford Financial Services Group. 

Annuity Addresses Longevity Issue

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  • Okeh annuity experts, CPAS, and you other financial wizzards: What is your opinion of this new effort
    by the insurance industry to capture Senior Reverse mortgage funds? Is there any way for this type of annuity to work without the loss of funds due to
    death prior to payment start date?

  • Let’s see, put in $100,000, get $83,600 20 years later. What happened to the $16,400? Commissions and service charges?

    Sounds like a great deal for the insurance companies. And the agent who sells them.

    There’s a reason for the disclosure requirements and this is a good example of why it’s there.

    Maybe someone can explain the benefit of foregoing 20 years of having the capital work for the investor?

  • Since I am a CPA, I thought I’d respond.

    With all due respect, I don’t think this is an effort to capture reverse mortgage funds.

    They appear to be best for people with liquid retirement assets that they are looking to invest or create an income stream with. I would never recommend that someone purchase one with reverse mortgage proceeds – the economics of that just don’t make sense in my view, not to mention the reverse mortgage industry frowns heavily on it due to unethical sales tactics that have occurred.

    I’m not an annuity expert, but given the limited knowledge of them that I have, some appear to be worth taking a look at. It appears that many can be structured with a death benefit or access to principal prior to death, but features like these require trade offs.

    One of the big benefits of some annuities available today is a guaranteed annual return in exchange for limited upside in a strong stock market year. Guaranteed (insured) returns are very appealing in this market, offering protection of principal and growth. Many retirees with money in the stock market would have been (or would be) much better off with one of these rather than a direct stock market investment, since their principal would have been protected (in fact it would have grown).

  • Hi Lance,
    Thank you for your response. While I’m not a CPA, I do have a degree in Accounting and have/held licenses in insurance, real estate and securities.

    Most of my perspective was based on the abuses that have historically taken place by the sales of annuities to seniors when the options of using a Reverse Mortgage provided “almost” the same benefit with a tenure payment. Show me an annuity with a 2% commission structure, a 50% per year withdrawal benefit with no early surrender charges and I would be impressed.

    While a tenure payment isn’t truly “lifetime”, when combined with the other aspects outlined in the Important Terms document, when properly addressed, provided a similar benefit without any of the costs and restrictions of an Annuity. And, there wouldn’t be a 20 year period with no benefit for the annuitant.

    For example, being able to change the payout terms for a fee of $20 going from tenure to term to credit line, and having the ability to return those funds that were not used to lower the carrying cost of the loan.

    From what I’ve read recently, with insurance companies losing 45% (Met life) to 70% (Prudential) of their values, there is enough uncertainty that creates a need for concern for the seniors I deal with, as these $ are usually representative of the last large asset these people have. With no further safety net. The “guaranteed” returns, what are the net amounts after reductions for marketing and other admin costs that attach to them? Substantially lower than what the big print talks about?

    As for the stock market, there’s nothing like 20/20 hindsight. Using that analogy, too bad more people didn’t take advantage of a Reverse Mortgage before their homes lost 30% or more in value to create larger payments, with more coming as the market adjusts for the excesses it went through during the boom years.

    As always, show me 3 situations, and I can show you 10 alternatives that would work for some, but not others. Retirees with limited incomes really shouldn’t be in the stock market, chasing income with not enough consideration for the losses that some have experienced. That’s why there are suitability tests that are “supposed” to be done.

    I have been in the Reverse Mortgage business for 5 years, have done hundreds of them, and am looking forward to the new products coming out to address the market changes and the opportunities they present for long range investments. For both the homeowner and the investors.

    Happy New Year.
    Mel

  • Strange this comes out of Met Life who was supposed to put a firewall between thier Insurance agents and thier mortgage officers. Now they can sell this wonderfull plan to seniors with all the cash from thier homes. Most likely they never mention that a reverse mortgage is basicaly a Reverse Annuity! Differance you use it but you don’t pay for it till you no longer need the property. Pray why borrow money as an example 100,000 pay intrest on the 100,000 to recive a monthly payment. if you want more you will pay apenaalty. if you need cash for an emergency you will have to borrow it and pay more. Can not pay back and draw again in the futuer. increas your monthly payment when you change your mind. Pay a prepayment penalty for early cancellation. Payments increase as credit line factor goes up. You can do this with a reverse with no penalty.

    Happy new Year to all and right on Mel

  • Let’s clarify a few points.

    Admin,

    These types of annuities (so called “deferred annuities”) are not new. Employers were using them back in 1981 to annuitize their liquidating pension funds. I know they were created long before that.

    Deferred annuities were the target of Chairwoman (and Senator) Claire McCaskill (D-MO) in the Senate Special Committee on Aging session dealing with reverse mortgages. It was made clear that the originator involved was from Financial Freedom which was mentioned more than once. (But I also know there are many other reverse mortgage originators from lots of other lenders who have sold these types of annuities to reverse mortgage borrowers.)

    Because of their many objectionable components, insurance companies have been offering add-on and replacement features to deferred annuities for the last few years.

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    Mel S.,

    The $83,000 plus is not a one year payment. It is the annual payment to the retiree for life. If the retiree lives to 90, the retiree has received over $400,000 for an investment of $100,000. But as an experienced insurance salesperson and securities dealer you knew that anyway.

    Second, the money in excess of the $100,000 is subject to income taxes and is taxable in part with each payment. However, unlike a reverse mortgage, the annuitant owns all of the money he/she receives; none of it has to be repaid. The trouble is if the annuity was acquired using reverse mortgage proceeds, the interest accruing on the reverse mortgage may not be available to be deducted against the annuity income in the tax years the deferred annuity payments are taxable. This is a major consideration when analyzing deals of this magnitude.

    Unlike reverse mortgage tenure payouts, annuity payouts are portable. Unless they are for a specific term, the payouts do not cease until death no matter where the annuitant lives.

    The trouble with buying a deferred annuity with a reverse mortgage is that the reverse mortgage could have more than tripled by the time the annuitant receives his/her first payment. On top of that the annuitant will have paid an reverse mortgage origination fee plus an annuity sales fee. As one lowly CPA, most deferred annuities seem to be questionable investments for most HECM borrowers.

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    Lance,

    At this point, I wonder if the AIG (and other annuity company) annuitants would be singing the virtues of so-called guaranteed returns.

    Not only do more liquid type clients use annuities, they are used all of the time in pension liquidations. In some situations they have been a real help to retirees who could not manage their funds if made available to them all at once.

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    Larry,

    I probably do not understand your comment. Tenure payments do not go up as a result of an increase in the credit line. The growth rate is incorporated into the tenure payments and reflects the expected interest rate. Tenure payouts are simple to compute on any financial calculator. The amount of the payout is a simple annuity problem based on the borrower reaching age 100.

    MetLife has every legal right to sell annuities at any time it wants. It can also sell reverse mortgages at any time it wants. Nothing in PL 110-289 stops them from doing that. It is the cross selling of these products by mortgage originators (including mortgagees) that Section 2122(a)(9) attempts to eliminate. Unlike you, I must have missed the cross selling aspects of the article.

    —————————————-

    — My comments —

    It is a violation of California law for any reverse mortgage originator to sell or even introduce a person who ultimately will sell an annuity to a borrower until after the period of rescission (closing, if a home purchase is involved). PL 110-289 has a much larger group of products it encompasses but does not prohibit the introduction of those who would sell the products. Despite PL 110-289, California Civil Code 1923.2(i)(2) restricts originators who originate in California from referring “ the borrower to anyone for the purchase of an annuity … before the expiration of the right of the borrower to rescind….” It appears that if a person who the originator refers the borrower to has a license that permits the referring party to sell the borrower an annuity, an annuity sold by the referred party to that borrower at ANY time following the initial referral could subject the originator to civil liability or worse.

  • answer to Larry is the credit line growth rate can change Rate is calculated at 50 basis point over the intial rate which changes monthly.Payments are generally fixed for life. But if you take a tenuer payments you might see more example: 10 year payment is calculated with todays rates. after 10 year you might see textra money because growth rate went up. Credit line growth rate can go up or down. Check your borrowers statments you will see the changes monthly.
    Huds mortgage letter when they stoped the applicant assaitnt program addressed selling annuity and mortgage as well as realtors would be treated as cross seling. This is why I question Met Life talking about annuties here.

  • It certainly would be helpful to know more about the annuity, and how the $83,600 figure is arrived at.

    According to the Society of Actuaries Annuity-2000 tables (with 1% mortality improvement) a 65 year old man has a average life expectancy of 21.9 years. But beware of averages. Upon reaching 65 he only has a 57% chance of surviving to age 85 and the survival rate to age 90 drops to 40%.

    The annuitant would have to survive well beyond age 85 to make the investment in the annuity pay off, particularly if reverse mortgage proceeds were used to pay for the annuity.

    When was the last time you made an investment that had a 43% chance of you losing your investment and getting nothing in return for it?

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