By David Blanchett

Overview

Annuity sales have increased significantly in the past year as the Baby Boomer population reaches peak retirement age, but even with this sales surge America’s retirees are still significantly under-annuitized.

Despite more than a half century of research detailing the potential value of guaranteed lifetime income products for retirees, sales of annuities remain lower than makes sense for a generation of retirees who are leaving private sector work often without benefit of a pension. There are a variety of theories that exist to explain why this “annuity puzzle” persists, but one notable (potential) barrier to annuitization is the irrevocable transfer of the premium common among annuities.

A product that addresses this concern, available since the 1990s, is an annuity with a “Guaranteed Lifetime Withdrawal Benefit” (GLWB) feature,¹ which is common with both variable annuities (VAs) and fixed indexed annuities (FIAs). These products guarantee some minimum level of lifetime income even if the underlying account value goes to zero.

GLWBs have recently fallen out of favor among some insurers, with a growing number of companies exiting the business. In response, new products are being introduced where the guaranteed income amount “evolves” during the payout phase based entirely on returns of the account, a product we refer to as a “Protected Lifetime Income Benefit” (PLIB). While similar to GLWBs, the PLIB is categorized separately because the way the income changes is materially different and the income can decline. The PLIB concept is not new, with tontines² being one of the earliest examples of products that provide protected lifetime income with a form of “shared” risk exposure.