Entering retirement can be a particularly jarring experience for seniors, and not only because they’re leaving behind the familiar world of work. For the change also requires a shift in one’s financial orientation — from savings accumulation to decumulation.

Above all, the transition brings into focus one overriding goal: how best to “pensionize” a nest egg so that your money outlasts you, and not the other way around.

Among the more 78 million baby boomers in or near retirement, the oldest of whom are now over age 70, retirement income planning has thus become an urgent priority. That’s true, too, for the thousands of agents and advisors who serve these boomers — a demographic group now in possession of lion’s share of the nation’s wealth.

“Americans age 55-plus own almost 70 percent of all investable assets  in the U.S.,” says Jafor Iqbal, an assistant vice president at LIMRA Secure Retirement Institute. “That’s a huge concentration of money. So naturally, advisors have changed their focus in recent years to incorporate retirement income planning in their practices.”

In tandem with this shift, insurance and financial professionals are looking to a range of solutions that can best secure senior clients’ post-retirement objectives. Among the main aims are preservation of principal, guaranteed income for life and healthy returns on invested capital.

There’s also this not-insignificant one: tax-favored treatment of retirement assets. This can have a potentially huge impact, not only on the quality of life in retirement, but also on money available to fund a retiree’s legacy planning objectives.


One vehicle well suited to achieving these goals is cash value life insurance. Ed Slott, a CPA, author and expert on individual retirement accounts, advocates that individuals move assets held in an IRA to a permanent, paid-up life insurance policy. The sweet spot is after 59 ½, when IRS tax penalties on IRA withdrawals no longer apply.

Why do this? Because unlike an IRA, funds in a cash value life policy can be accessed free of income tax (up to cost-basis through withdrawals; and thereafter as policy loans).

The tax-favored treatment also lets policyholders avoid “stealth taxes” that kick in because of increase in taxable income. For example, an IRA distribution could boost tax on Social Security benefits or trigger a 3.8 surtax on net investment income from capital gains, investment income or dividends.

Cash value life insurance is also exempt from required minimum distribution (RMD) rules governing IRAs. Seniors can thus let their policy’s cash value grow beyond age 70 ½ (the age at which IRA holders must begin taking income) on a tax-deferred basis.

“People think of life insurance for the death benefit, but most people don’t know about the powerful lifetime retirement and tax benefits,” observes Slot. “Funds in a permanent life insurance policy can double as a retirement savings account, but without the worry about what future tax rates will be.”

All well and good. But others are unconvinced that life insurance policy is the best place to park retirement assets. If, say, the senior client’s main objective is growth potential, then alternative vehicles may be a better bet, especially in a low interest rate environment, which can depress returns on interest-sensitive universal life policies.

One option to consider: a reverse mortgage, which let homeowners borrow money against their home equity. When interest rates are low, the loan to repaid — structured so as not to exceed the value of the home, and which only becomes due at the borrower’s death or when the property is sold — will be less burdensome. Upshot: more cash on hand to fund retirement or estate planning objectives.

Or so one would hope. Experts caution against rushing into a strategy for funding retirement through loans, whether via a reverse mortgage or cash value life policy. The right technique will ultimately hinge on a rigorous analysis of the options; anything short of that could put the retiree at financial risk.

“You have to run the numbers to see which strategy makes most sense,” says Moshe Milevsky, an associate professor of finance at the Schulich School of Business at York University in Toronto. “The number one question to ask is, ‘What will be the interest rate at which I’m borrowing money?’ If the rate on a policy loan is high relative to a reverse mortgage, which can create a similar tax-free income stream, then the reverse mortgage may make more sense.”


The prevailing interest rate also must be considered when investing in interest-sensitive fixed income vehicles that can provide a guaranteed retirement income stream. These include savings accounts, bonds, certificates of deposit, money market funds and fixed annuities. Of these, only the last can assure retirement income for life, a top priority of seniors, as recent research indicates.

“Almost two-thirds of annuity sales are for guaranteed lifetime income products,” says LIMRA’s Iqbal. “And one-third of the buyers are ages 65 and older.”

Many of these retirees are looking not only to pensionize their nest eggs, but also secure a larger monthly income stream than available through other fixed income vehicles. An annuity kick-started later in retirement (e.g., at age 67 or 70) will, like Social Security, pay out more than one begun in earlier years.

The reason: mortality credits. As annuitants taking income from a common pool of cash pass away, more money is freed up to distribute to surviving annuitants. With each additional death, the mortality credits increase, and therefore also monthly payouts.

Such credits may suffice for seniors look for a steady fixed income and can afford to postpone distributions to future years. The chief vehicles for this approach are conventional fixed annuities, including single premium immediate annuity (SPIA) or, if payments don’t start right away, a deferred income annuity (DIA).

But for those desiring growth over and above the prevailing interest rate, vehicles offering an equity component tied to stock market performance may prove more appealing.

Notable among them are fixed indexed annuities, which (depending on the insurer-stipulated formula) capture a portion of stock market returns, while also protecting against downside risk. As with a traditional fixed annuity, investors can count on a receiving guaranteed minimum interest rate.

Alternatively, senior clients can invest in variable annuities, products that, through separate accounts that invest in mutual funds, boast full participation in stock market gains — a key attraction for retirees looking to ride the current bull market.

Risk-averse investors looking to protect their nest eggs against market fluctuations can also add a guaranteed living benefit, including income, withdrawal, accumulation and death benefits, to the product chassis via an optional rider.

These GLBs are, however, not as generous as they were before the market crash of the last decade, which severely taxed VA manufacturers’ balance sheets. What GLBs are still available on the products, they come with higher fees than in years past — expenses that many view as uncompetitive relative to comparable riders offered on fixed indexed annuities.

York University’s Milevsky thinks such views are misplaced.

“There’s a widespread belief that fixed indexed somehow don’t have fees, whereas VAs are laden with them,” he says. “This shows a lack of understanding about the products.”

“In fact, fees are embedded in fixed indexed annuities,” he adds. “Product manufacturers are just not forced to disclose these fees the way they do with VAs. The two products are structured differently.”

Nonetheless, boomer-age retirees and pre-retirees are increasingly navigating fixed to indexed annuities — and manufacturers are only too happy to oblige the growing demand. Justified or not, the perception that FIAs offer a better balance than VAs in respect to cost, investment yields and protection against market gyrations has gained wide currency.

This much is clear: Consumers enjoy a wide and growing selection of product. Whereas VAs providers have dwindled since the Great Recession of 2007-2009, the number of FIA carriers has increased markedly — as has industry revenue.

In 2016, fixed annuity sales hit a record-breaking $117.4 billion (though fourth quarter sales fell 13 percent to $25.7 billion). Full-year sales were 14 percent higher than 2015 levels and nearly $7 billion higher than 2009 (when sales were last at their highest), according to LIMRA Secure Retirement Institute’s “Fourth Quarter U.S. Annuity Sales survey.”

As the FIA market has expanded, so has product innovation. Case in point: Voya Financial’s Journey Index Annuity, a fixed index product that offers 100 percent participation in the growth of one or more dynamic indices over a 7-year period.

Others players among the 60-plus FIA product manufacturers also are revamping the FIA’s various moving parts — indexing method and index term, participation rate, margin/administrative fee, cap rate, floor, interest crediting method, vesting and GLBs — to boost the product’s growth and retirement income potential.


One other component, compensation paid the producer, also has an impact on product performance. In the wake of the Department of Labor’s now delayed fiduciary rule, market-watchers anticipate greater uniformity of commissions among like products.

To the extent that commissions (and thus annuity expenses) also decline, customers may benefit in the form of shorter annuity surrender charge periods and/or greater participation in market returns.

The DOL rule may also accelerate a shift in compensation from commissions to fees, as the latter, the rule’s backers insist, better aligns with a business model consistent with the rule’s chief aim: encouraging agents and advisors to act in their client’s best interest.

At the carrier level, an evolution in compensation is already underway. Several companies— Great American, Midland National, Lincoln National and Sammons Retirement Solutions — have recently developed fee-based indexed annuities. Sheryl Moore, president and CEO of Moore Market Intelligence, expects more such products to hit the market, but she believes they’ll need time to gain traction. That’s because of the challenges so many producers face (not least a potentially significant loss of revenue) when making the transition from commissions to fees.

“A lot of companies will launch fee-based indexed annuities,” she says. “But companies selling these fee-based products are not going to instantly see sales success. As to advisors already operating on a fee-basis, few of them sell fixed indexed annuities today.”

The same cannot be said of fee-based VAs. A leader this space is Jefferson National, which the multiline insurer Nationwide acquired last September. Jefferson National’s VA platform, Monument Advisor, boasts nearly 400 mutual fund choices.

The company now sells the product to nearly 4,000 RIAs and fee-based advisors. For a flat $20 per month fee, clients can secure not only professional asset management of their investment portfolio, but also a signature benefit of an annuity wrapper: tax-deferral of market-generated gains.

VAs (fee-based or otherwise) could benefit from a drop fixed indexed annuity sales in 2017. LIMRA expects FIA sales to dip to $40 billion 2017 due to the fiduciary rule (the applicability date for which has delayed from April 10 to June 9 to allow for a DOL review of the regulation). As now written, the rule subjects FIA’s to the rule best interest contract exemption (BICE), as well as heightened litigation risk.

Moore believes, however, that retirement advisors will navigate not to VAs, but to conventional fixed annuities. The reason: Commissions on sales of a fixed annuity remain permissible under prohibited transaction exemption (PTE) 84-24, a less onerous regime than the BICE.

With or without a DOL rule, the longer-term trend, market-watchers say, will be a migration among producers to an advisory model that gives priority to comprehensive financial planning. This shift will require a broad set of solutions — including fixed, fixed indexed and variable annuities, among other vehicles — that can be tailored to the senior client’s retirement income objectives.

“Many brokers are already moving to this model,” says Carolyn Johnson, CEO of annuities and individual life insurance at Voya Financial. “The DOL rule is only accelerating this shift.

“Regardless of whether and when the rule is implemented, advisors will continue along this path,” she adds. “That’s good for customers because an investment advisory model demands ongoing servicing of clients and a holistic planning focus.”


This shift will entail embracing other products that can protect retirement eggs against medical and related experiences that seniors experience in later years as their health fails. Among the solutions: hybrid or linked-benefit life insurance and annuities that come with a long-term care rider. These combo products are an outgrowth of the 2006 Pension Protection Act, which encouraged the purchase of long-term care insurance by allowing policyholders to take tax-free distributions from their life and annuity policies to cover LTC expenses.

Since the PPA’s passage, linked-benefit annuities have been slow in coming to market, in part because few annuity manufacturers have experience underwriting long-term care.

A leader in this space, Global Atlantic Financial Group, which markets combo annuity-LTC products through Forethought Life Insurance Co., has achieved success in annuity-LTC sales where other carriers struggled. The reason, notes Moore, is its broad distribution strategy: The company markets its hybrid product, Forecare, through a nationwide network of banks, broker/dealers, IMOs, independent agents and funeral homes.

Linked benefit solutions have achieved greater success in the life insurance space, most notably with indexed UL products. Nationwide, Pacific Life, RiverSource Life, Transamerica, among other insurers, offer combo life-LTC solutions, including riders covering both long-term care and chronic illnesses.

“Life insurance products are better positioned to carry LTC and chronic illness riders, particularly on indexed UL life products,” says Moore. “These riders have become a source of competitiveness for product manufacturers.”

“About 70 percent of American seniors will need long-term care at some point in their life,” she adds. “That’s a staggering statistic.”

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