26 April 2017

New Annuity Guarantees Raise Questions

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Source: Wall Street Journal | Date: February 3, 2013

With millions of baby boomers headed to retirement without old-fashioned pension plans as safety nets, here is a product that would seem to have big appeal: a guarantee of lifetime income from a portfolio of ordinary mutual funds—however long the investor lives and even if the stock market tanks.

That's what the life-insurance industry thinks. For years it has sold income guarantees on variable annuities, but relatively high fees have limited the popularity of those products. Now, insurers are starting to offer a cheaper guaranteed-income product that they hope will sell better. But there are lots of issues for potential buyers, including questions about cost—still—and the ability of insurers to fulfill the promises they make.

Regulators in some of the biggest states have yet to approve these "contingent deferred annuities." They are worried that lifetime-income guarantees sold on a mass scale could be harmful to insurers' financial health if markets were to slide as they did in 2007-09, putting insurers on the hook for massive payouts.

"Regulators want to make sure the companies have reserved properly and have enough capital" to make good on the guarantees in 20, 30 or 40 years, says James Mumford, a senior Iowa regulator. He is one of a group of officials at the National Association of Insurance Commissioners that for the past year has been devising rules for the new products.

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