By NIJU VASWANI
When it comes to guaranteed lifetime withdrawal benefits on a fixed indexed annuity, why are joint payouts often left out of the conversation? Hint: It’s not because spouses don’t want or need joint payouts.
Many couples share finances and need their retirement income to last as long as either spouse is alive. In fact, under the Retirement Equity Act of 1984, federal law requires married people to elect joint and survivor annuity payouts on a pension unless their spouse signs a notarized statement waiving their rights to the money.
But joint payout elections on an FIA are few and far between. Why is that? Typically, annuity income riders are structured to favor single lifespans, resulting in a vast majority of payout elections covering a single life — even if the annuitant/owner is married.
According to Society of Actuaries projections, for a couple at age 65, there’s a 50% chance that one person in the couple will be alive at age 92.
That’s one in two survivors who may live for many years with lost income — all while coping with the loss of a loved one. Does it make sense that their ongoing annuity income source is eliminated just when they may need it most? It’s time to rethink joint payout elections.
Guaranteed lifetime withdrawal benefit riders — often called income riders — use payout percentages to help determine a client’s yearly income. The payout percentages for joint payouts are typically — sometimes drastically — lower for joint annuitants than for single annuitants, resulting in lower income for two individuals.
Actuarially speaking, this percentage reduction makes sense. Insurance companies must price income riders in a way that won’t break the bank. Chances are that one spouse will outlive the other; hence, an insurance company will pay out a guaranteed stream of income for a much longer time period for two individuals as opposed to one. Insurance companies need to make up the dollar difference somewhere. The problem is: Over time, agents have become so accustomed to seeing such a large drop in income rider payment amounts for joint coverage that few even present joint illustrations to their clients today.
Another reason joint elections are often disregarded is that, for years, many insurance companies structured their income rider to group payout percentages by age. For instance, clients ages 55–59 could have received guaranteed annual income equal to 3% of their benefit base, while clients ages 60–64 could have received 4% of their benefit base annually.
Because the age of the younger spouse generally is used to determine lifetime income amounts, this age-banded structure had a tendency to penalize couples. A couple age 59 (female) and 60 (male), for example, would have received a 3% payout percentage instead of 4%. But, by electing single male payouts, which tend to have higher payout percentages than joint payouts, the same couple could have received a 4.5% payout percentage for the husband’s life — increasing their income by 50%!
With such a dramatic difference in income, the joint payout conversation has become muted. Consumers who weighed their options didn’t see the value of electing the lower joint payouts.
Although single male payouts may provide higher annual income, the challenge is that it lasts only while the covered person is alive. Income stops when the husband dies, but for the surviving spouse, expenses continue. This may leave clients in an unfortunate and avoidable financial situation.
While cash flow is a crucial consideration for clients choosing a payout election, it isn’t their only deciding factor. They must also consider who will be impacted by the decision both now and in the future.
The good news? Today, age banding for payout percentages is becoming a thing of the past, offering a much more favorable guaranteed payout for spouses. Additionally, on some FIAs, the wide percentage gap between single and joint elections is closing, making the joint payout conversation relevant again!
What if you could provide couples the peace of mind of guaranteed income for the length of both of their lives, without a large dollar reduction in payments? With some of today’s FIAs, you can.
When preparing to meet with a married couple, compare income riders by running joint illustrations. It’s possible to find joint payouts that are within 7-10% of their comparable single male payouts.
Ask your client, “Would you rather receive $1,000 per month for life, leaving no guaranteed income for your surviving spouse, or $910 per month for as long as either of you lives?” For many, the answer to the question in this hypothetical scenario is easy; the value provided by covering both spouses is worth a $90 reduction in monthly income. And, by choosing the slightly lower joint payments, the wife would only need to live less than 1½ years beyond her husband to recover the dollar difference. This is a likely scenario, considering the Society of Actuaries estimates there’s a 45% chance that a wife outlives her husband by five years and a 20% chance she outlives him by 15 years.
For married clients who share expenses and assets, it’s time to put joint payouts into the election conversation. When you offer couples their choice of payout elections, you’re demonstrating that you have their best interests in mind, and you put your clients in the decision-making driver’s seat — a win-win for all.