NAIC rules to have major impact on Insurance company liquidity

Earlier this week the NAIC announced a major policy shift related to the rules and regulations for life insurance companies as it relates to their reserve and surplus requirements. These modifications, first reported in the Wall Street Journal, could have a dramatic impact for the better on the capital requirements that companies such as Met Life, Prudential Insurance, American General, Hartford Financial and Genworth are struggling with.

One of the least reported elements of the recent capital crunch for life markets is the pressure caused by these annuity reserve requirements. Many of the negative financial reports of the last 90 days for life companies were directly related to their necessity to move huge amounts of current earnings or surplus into reserves to account for requirements to reserve variable annuity guarantees and future market yield calculations.

The proposed modifications will greatly reduce the pressure on life markets to pour huge amounts into reserves for this product line, free up current reserves and significantly lessen the need for capital at a time when raising capital is both expensive and difficult.

This is clearly very good news for life markets, and as I outline in my commentary, still provides for a high degree of safety for the annuity holders and life insurance beneficiaries.

You can read the Wall Street Journal article by clicking here.

You can view and listen to my Speaking of settlements podcast by clicking here.

Ben Stein agrees, annuities could save your life!

Actually i'm paraphrasing a bit, as Ben's actual article is entitled " How not to ruin your life" and today's commentary on Yahoo Finance is about using the new variable annuity contracts to manage risk in retirement or if you have a large sum of money you need to use to guarantee income for life. ( Sound familiar to anyone in the structured settlement industry?)

You can read his entire commentary here. 

However, for those of you who like summaries in lieu of actual reading the highlights are as follows:

1. New features included in variable annuity contracts now allow for 5% annual guaranteed withdrawals of funds for life, regardless of actual investment performance. In reality many life companies are now offering payments up to 9% guaranteed for life, depending upon attained age at which the rider is purchased, but the point is that it is a unique benefit that allows for transference of market risk to a life insurance company instead of bearing that risk yourself.

2. The funds stay fully invested in equities, which is essential for people to retain the ability to match market yields and keep up with inflation. This means that while your base income of 5% is fixed upon a starting date amount, your funds stay fully invested in a portfolio of variable accounts and then your based income amount is reset every 5 years or so, providing you with the potential for a step up in your income at that time. If markets decline however, you know your income won't decrease despite falling equity values.

3. Many of these contracts have a bonus feature at deposit that allows you to get an immediate step up in value for your income amount. Basically, if you put $500,000, in many contracts you will receive anywhere from a $15,000 to $25,000 bonus at deposit, thus allowing investors to catch up and set their base amount for income somewhat higher.

4. All of these contracts have locked in death benefits that are paid income tax free upon death to the annuitant. Few if any investments enjoy the death benefit step up features available in the new variable annuity contracts, and as a result the income tax free death benefit is a major value in paying to beneficiaries a figure that could very likely be much more then the market value in a down market.

These are really outstanding annuity options for retirees, people considering retirement or injury victims who are contemplating what to do with their award. I've written about them before here on The Settlement Channel but I really do urge you to take the time to learn more about them. They can be complex, require you to work with a licensed registered representative and the reading material can be daunting. However, at their core they are very simple, have great appeal and provide a degree of security for income oriented investors that is almost unmatched in other financial vehicles.

As I've said before, the structured settlement industry ignores these products at their peril as these have many of the primary benefits of a structured settlement annuity, minus many of the drawbacks. You can bet i'm already appointed to offer these to my clients and do so on a regular basis.  

What the Wharton study didn't mention about the value of immediate annuities.

As I pointed out in a prior post that highlighted the recent Wharton School study on the use of immediate income annuities, empirical evidence by top scholars is beginning to build a factual case as to why immediate annuities and life income annuities are a superior choice for individuals with limited assets and are facing retirement.

What they failed to mention in that article, and in the study, is that not only is an immediate income annuity the superior choice for investors looking to create an income out of a lump sum they have accumulated for retirement, but that many of the life markets are beginning to allow for sub-standard life underwriting on non-structured immediate annuity business.

Why this is important is obvious to anyone who works in the settlement annuity business, which is that substandard medical underwriting allows for an individual with an impaired medical profile or history to actually benefit from that fact by having their actuarial age set higher/older by the life company, thus increasing the amount of money available in monthly payments, all while transferring the risk of out living your money to the life insurance company.

I strongly suggest if you are a settlement professional, trial lawyer or financial professional that you take the time to look at the findings in the Wharton study and get a firm grip on the conclusions. The picture it paints for immediate annuities, and by extension structured settlement annuities, is very positive and it's something that deserves wide circulation among trial lawyers and others who work with injured parties, retirees and others looking at the best method of maximizing their monthly income for the duration of their lives.

While the full study is yet to be made available on the Wharton site, you can find some outstanding resources by clicking through their knowledge page. Wharton has done a superior job in starting to look at the decumulation phase of spending lump sums over time and it is clearly in the interest of our industry to be aware of this research.

You may access the Wharton site by clicking here.