We would love to hear from you. Click on the ‘Contact Us’ link to the right and choose your favorite way to reach-out!

wscdsdc

media/speaking contact

Jamie Johnson

business contact

Victoria Peterson

Contact Us

855.ask.wink

Close [x]
pattern

Industry News

Categories

  • Industry Articles (21,155)
  • Industry Conferences (2)
  • Industry Job Openings (35)
  • Moore on the Market (414)
  • Negative Media (144)
  • Positive Media (73)
  • Sheryl's Articles (800)
  • Wink's Articles (353)
  • Wink's Inside Story (274)
  • Wink's Press Releases (123)
  • Blog Archives

  • March 2024
  • February 2024
  • January 2024
  • December 2023
  • November 2023
  • October 2023
  • September 2023
  • August 2023
  • July 2023
  • June 2023
  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • November 2010
  • October 2010
  • September 2010
  • August 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010
  • March 2010
  • February 2010
  • January 2010
  • December 2009
  • November 2009
  • October 2009
  • August 2009
  • June 2009
  • May 2009
  • April 2009
  • March 2009
  • November 2008
  • September 2008
  • May 2008
  • February 2008
  • August 2006
  • Annuity Anomaly: EIA + GLB > SPIA?

    July 8, 2013 by Moshe A. Milevsky

    Yes, I know that with an EIA you don’t have much choice in terms of the investment allocations, which are usually linked to an S&P 500 index ­minus any dividends, while the VA gives you a robust line-up of many different funds and subaccounts. And yes, the EIA ­imposes low caps and tight participation limits on the growth of the account value, which reduces the probability you will get anything more than the guaranteed minimum. Also, one is a security while the other is an insurance policy. These are important, but secondary, details.

    I should point out that as ­insurance companies continue to place asset ­allocation restriction on the sub-­accounts within the VA + GLWB and policy-holders are given less freedom to ­allocate and move money around, the actual performance of these accounts might soon resemble a neutered and passive equity index.

    From an insurance company ­accounting point of view, though, there is an important difference between what the company does with the VA money versus the EIA premium. In the former the company places the funds in a separate account and has to worry about hedging the downside risk. In the latter, the company places the funds in its general account and then has to worry about crediting you with interest on the upside. And, while financial economics might dictate that these are identical exposures, in practice things can be different depending on how the crediting formula is structured.

    In fact, this is why you can occasionally find EIA + GLB combinations offering more income relative to a VA + GLWB, which shouldn’t be too surprising given the difference in underlying accounts, liquidity provisions, etc. But the irregularity that attracted my attention was EIA + GLB versus the SPIA.

    Beat the SPIA

    The table nearby provides some indicative quotes where the guaranteed minimum income from an EIA + GLB is compared to the guaranteed income from a SPIA. Take for example a 65-year-old couple with $500,000 dedicated to buying a life annuity, with income starting in 36 months (perhaps when they plan to retire).

    The average payout quote for a joint-and-last survivor annuity was $30,390 per year, which is a payout of (approximately) 6% for as long as either of them lives. Now look at the column which says EIA. It offers the same couple a payout of $31,750 per year (starting in 36 months), continuing for as long as either of them is alive. This is about 5% more than the SPIA, but also offers upside potential.

    Namely, if the underlying index does well (OK, more like a triple-lutz-triple-toe jump) in the next 36 months, the benefit base will be higher—but never less. Also, being an EIA it offers some liquidity and is cashable. Of course, you have to pay steep surrender charges, but remember, the SPIA would have offered you no liquidity whatsoever. Ergo, I consider this an anomaly that can’t be explained by credit risk or default concerns because all quoted companies were in the same risk bin.

    Now, this EIA + GLB > SPIA anomaly doesn’t apply at all ages. Notice that at higher ages such as 70 and 75, the payouts from the SPIA dominate the guaranteed payouts from the EIA for single lives, as they should, although they are quite close for joint lives.

    Needless to say, the table is just a snapshot in time for a few companies, so it’s difficult to make general statements about the exact ages at which one option dominates the other, but this does happen, especially for joint lives.

    Rational Explanation

    The reason an EIA can guarantee a lifetime payout that is higher than a SPIA for younger females and/or a longer delay period, is partially due to the assets backing an EIA versus a SPIA and partially because of the unisex and lapse-supported nature of the EIA + GLB pricing.

    SPIAs are sold and priced based on more conservative assets and with the unique age and gender of the ­annuitant, while EIA + GLB are more loosely organized into pricing bands and are not priced to be gender specific. Moreover, the insurance companies assume that some policyholders will surrender their EIAs before they ever convert them into income, which allows them to offer just a wee bit more to the rest. Add this all together and you find that younger females might get more, relative to a SPIA which is priced with zero lapsation and calibrated to an exact age.

    And remember, the numbers in the table are only the guaranteed payouts for the equity-indexed annuity. If the underlying (S&P 500) equity index moves up at the right time and at the proper speed—no matter how remote you gauge the probability—the guaranteed lifetime income will be higher.

    Here is the bottom line. If you strip out the shady sales practices and the 15-year surrender charges, underneath it all is an intriguing insurance proposition for advisors who are willing to understand and wade into a (potential) minefield.

    Now, I want to be crystal clear here, lest readers suspect that I was hit on the head with a hockey stick and am suffering from an intellectual concussion. I am not saying that an equity-indexed annuity is better than a variable annuity with a GLWB. That is an apple to pineapple comparison. My point is rather modest. Sometimes insurance pricing can be weird. Take advantage of it. So, before you pull the trigger on an irreversible life annuity for a younger client—especially if you are piling on refunds, period certain and guarantees—you might want to run a quote for an EIA + GLB. Like me, you might be surprised.

    P.S. No. Mom didn’t get the EIA.

     

    Originally Posted at AdvisorOne on July 1, 2013 by Moshe A. Milevsky.

    Categories: Industry Articles
    currency