SPIAs a Historical Perspective

gm-bioIt occurred to me after writing fixed lifetime SPIAs for more than 30 years; I achieved a 100% persistency rate (except for a few deaths) and every consumer purchase along the way has been the absolute deal of a lifetime.  I mean, how many financial products have been in a bull market for more than 30 years?  Interest rates have only trended down since the mid-to late 1980s and carriers have only increased lifetime expectancy durations.  Both of these pricing elements work to reduce annuity income but only for new prospective purchasers. Because all the issued contracts were permanent and guaranteed on their purchase dates, the carriers are now stuck with all the business that I and other agents wrote.   Now, the carriers’ only hope is a quick annuitant death (apparently not happening at the rates hoped for on the issue dates) and the running out of period certain payments (if any).

As an agent, I have had the great experience of not only working extensively with commercial SPIAs but also with structured settlements (litigation SPIAs) and charitable gift annuities (CGAs) too. No complaints, for a $100,000 premium, what 85-year old male today is going to complain about having collected about $314,160[i] because his monthly annuity rate for a 10-year period certain and life annuity issued 28 years ago was $935.00 vs. the paltry rate of $432.00[ii] per month a male 57-year old can purchase today (talk about a bull market!).   While many of these SPIA holders experienced average and somewhat uneventful post contract purchase lives, there were a few where their lowly SPIA contract made a world of difference keeping them from becoming complete disposed of income (other than Social Security income).   The real benefit of a fixed SPIA is its design. The design affords a very long-term staying power above all other financial products and protects consumers when things don’t go as planned, when life takes an unexpected turn for the worse.

However, a good thing for many carriers is; most annuity agents during the last 30 or so years sold deferred annuities and agents who established deferred annuity “books” continued to roll contracts, of the time (up until about 2008), to generally better current rates, but they did so mostly at the expense of accepting ever lower contract guarantees.  For a host of reasons, ranging from relatively low agent and distributor compensation to consumer demographics, SPIAs have always been a very small share of the overall annuity market.

However, along the way, there still remains a few deferred annuity contract owner holdouts. Those who have been fortunate for one reason or another to continue holding old contracts issued in the 1980s and 1990s. Not only are they receiving great cash value annual crediting rates and have access too much older guaranteed mortality tables (unadjusted) but their kids (beneficiaries), get the same guarantees too! Why is that? Because, unlike today where many deferred annuity contracts have divorced the cash value crediting rates from the guaranteed “settlement rates”, these two issues where at one time, joined at the hip. Because of older contract language in deferred annuities, the guaranteed cash value crediting rates are the same rates guaranteed for contract settlement purposes.   For example: After speaking with an age 50, POA, daughter managing her father’s estate holding $5 million in old Presidential Life deferred annuity premium at 5.00% lifetime guaranteed crediting rates and after she was solicited by a financial planner to replace the contracts, I convinced her (not too hard to do) to continue to hold onto her father’s contracts. She as the beneficiary has the right to collect the same 5.00% for up to 30 years (period certain settlement rate) because that’s what the old Presidential Life contracts guaranteed. She also has access to the 1983 Individual Annuity Mortality (IAM) Table (unadjusted) as well if she wanted to go that way (mortality pooled-lifetime). Of course, now, because of an acquisition, Athene Life of New York has to make these payments.   But, many carriers are in the same boat.

That’s one reason why annuity reserves are budging at the seams.  Of course, there isn’t a single carrier who will talk to consumers or their beneficiaries about settlement rates.  Better for these annuity carriers just to sweep all the settlement rate talk under the rug and “ignore that man behind the curtain”.   When was the last time or have you ever seen a recent annuity death claim settlement letter? Most letters basically tell the beneficiary; here is your lump sum payment amount, sign here and oh, by-the-way, contact us for other payment options with undisclosed details.

What happens next? SPIA prospects are bright. While interest rates are at all-time lows (going lower?) and longevity estimates continue to escalate, consumers still need the long-term staying power these contract designs produce. Given current economic conditions and continued stains on society SPIAs are need more than ever. The new DOL Fiduciary rule maintains SPIA contracts under the old PTE 84-24 exemption making it easier for life insurance only agents to continue accepting commissions for qualified funds.

Furthermore, regarding qualified funds, FIAs with their secondary lifetime income guarantees, a close cousin of the SPIA will eventually require BICE contracts before agents can accept commissions.  At this point, only a few IMOs (less than 10) made applications to become official “Financial Institutions” under the DOL rules to enter into BICE contracts with the consumer on behalf of the life insurance only agent. At this early point, no one knows what IMO organization will actually obtain DOL approval and when or what the IMOs own terms and conditions might be to support life insurance only agents.

Perhaps, it’s all just as well maybe even an intended consequence of the DOL. The DOL could just end up unleashing brigades; 150,000 (LIMRA 2010) strong of life insurance only agents, now re-evangelized warrior poets, armed with boat loads of SPIA applications. Hey, I’m there.

Life insurance only agents and their distributors are going to have to re-evaluate SPIA usage. While the overall agent and distributor compensation is significantly lower, it will take some time to acclimate agent distribution and the carriers. However, because of decades of deferred annuity dependence, modern annuity agents for the most part, don’t have SPIA skills. Carriers, for the most part contribute to agent deferred annuity dependence because FIA designs are major annuity profit centers and not SPIAs. So, there will be a lot of work to grow future SPIA agent utilization. However, sometime after the issue date, if your client gets into a real financial gun fight of a lifetime, trying to preserve their incomes in their twilight years; they are going to need to bring the SPIA big gun and not the FIA with secondary guarantees knife to the fight. That’s the idea; Always Keep Your Hands Up!

[i] Actual SPIA 10CL Contract, Still In-Force and Issued by Xerox Life 1988

[ii] SPIA Market Estimates at Time of Writing

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