Editors' pick: Originally published Oct. 25.
With a demographic tidal wave of more than 10,000 baby boomers retiring every day, a new growth industry will be income insurance sales.
People are living longer, and the need for guaranteed lifetime income to supplement Social Security payments will be a must for most Americans.
Home, Car, Health ... Income?
In order to own a home or drive a car, individuals are required to have insurance. The same buying requirement applies to health insurance, thanks to the Affordable Care Act.
Common sense suggests that income insurance is the next logical step for transferring risk. Except in the case of government workers, employers probably won't offer a pension or even a gold watch for dutiful service.
The typical retirement plan offered is what is called a defined-contribution plan set up for growth, not income. Individuals are pretty much on their own to create an income stream during retirement, so they need income insurance.
The Government Is Aware of the Problem
The government is definitely aware of the growing need for people to plan for future income needs.
In July 2014, the Department of Labor and the Internal Revenue Service approved Qualified Longevity Annuity Contracts for use in 401(k)s, traditional individual retirement accounts and other specific types of retirement plans. QLACs are future income payments that are guaranteed for life.
QLACs aren't the perfect solution but are a good start in the right direction for income insurance.
Many 401(k)s offer QLACs as a future pension choice, but the most that can be put in is $125,000. That amount will go up slowly over time, but other forms of income insurance are needed by most people to achieve their desired retirement lifestyle.
Social Security Payments Will Never Fill the Gap
When the Social Security program was introduced in 1935, the program wasn't designed to be a one-stop pension. It was supposed to be supplemental federal assistance for the elderly and came as a welcome relief after the stock market crash of 1929.
However, too many people rely solely on their Social Security payments without properly planning for additional lifetime income needs.
Unless drastic changes are made, the Social Security program won't survive in its current form. In the near future, means testing and age increases for eligibility will likely be implemented in order for Social Security to continue.
This is even more reason to consider the purchase of personal income insurance.
Annuity Alpha Is the Longevity
The only financial product on the planet that guarantees a lifetime income stream, regardless of how long one lives, is an annuity that is contractually structured for lifetime payments. The annuity company is on the hook to pay.
Social Security is a transfer of risk to the government for lifetime payments. The same principal applies to income annuities.
All guaranteed annuity payments, regardless of the type of annuity, are primarily based on life expectancy at the time that the payments are taken. Interest rates do play a secondary role in the pricing, but how long one is expected to live is the game.
That is the bet between an individual and the annuity company. If a person lives longer than the projected life expectancy, then the annuity company is required to pay for as long as he or she is breathing.
That is the unique benefit proposition of an annuity policy set up for lifetime income.
Do People Really Hate Annuities?
Do people hate their Social Security payments? Do they hate their pension payments, if they are fortunate enough to have them?
Of course not.
So when one hears the uninformed and misleading "I hate annuities" mantra, think before nodding in agreement.
Annuities that are contractually structured for lifetime payments are pure income insurance.
Below are the primary types of annuity strategies and the specific income needs that they can solve.
- Charitable gift annuities (CGAs): Structured like SPIAs, charities and non-profit organization issue these payments. Claims-paying abilities are based on the organization, and CGAs can provide major tax benefits.
- Deferred income annuities (DIAs): Structured like a SPIA but with income starting as soon as 13 months from the contract issue date and as far out as 40 years. DIAs are also called longevity annuities.
- Income riders: These are attached contractual benefits to some indexed and variable annuity policies that guarantee payments to start at a future date.
- Qualified longevity annuity contracts (QLACs): Used within traditional IRAs or 401(k)-type plans, income can be deferred as far out as age 85. QLACs also lower taxes on required minimum distributions.
- Single premium immediate annuities (SPIAs): Solves immediate income needs with guaranteed payments starting as soon as 30 days from the contract issue date.
Always remember that annuities are commodities, and individuals should shop as many carriers as possible in order to find the highest contractual guarantee for specific situations.
Most of us shop for car and home owner's insurance.
Now it is time to shop for income insurance. Future retirement lifestyle depends on it.