As discussed in an earlier post, I am now reporting back with greater detail on the new Index Linked Annuity rider which Pacific Life will be adding to their structured settlement pay out options early in April of 2014.
Right out of the gate let me qualify this review by stating that Pacific Life is awaiting some final compliance reviews internally so the formal launch date is a bit of a moving target, but I think we can safely assume this will be available on new cases early in Q2 of 2014.
The product/rider is entitled as the Index Linked Annuity Payout Adjustment rider, or ILAPA. A long name for a very simple concept. The product has some underwriting restrictions, such as the fact that there must be a 60 day period between the contract date and the income start date, that it is not available on cash refund structures and that it is an income rider, not an indexed accumulation product. However, those underwriting and product design elements aside, this is a substantial step forward in product design, options and benefit streams for a profession that hasn't seen a meaningful product innovation in well over 15 years.
In a nut shell:
- The product/rider has a 5% annual index cap, based on the S&P index over the 12 months leading up to the 15th of the month immediately prior to the contract anniversary date. If the index goes up 5% or more in the period, the annuitant gets that gain, but always capped at 5%. So, if for example the index goes up 14%, you still only get 5%. Therefore it is important to know how that cap works and is calculated so you can properly explain it to your clients. Also, important to note that it also increases in any increment up to 5%, so If the index goes up 2.4% in a year, you get that 2.4% percentage bump in your payments on the anniversary. The cap is only on the top end and any return under that cap amount is recognized as an increase in that year.
- The product/rider also has an annual floor of 0%, effectively meaning that what ever the base income is at inception, lets say $100 monthly, then if the market goes down 15% you still are at your based income for that year. No gain that year, but also no loss either, a huge point given the risk profile of the average structured settlement beneficiary. Your income never retreats, it only stays the same or grows.
- Once the increase occurs and the base income increases in any year, that now becomes the new base line income level, meaning it will never revert back to the original amount no matter what the market does over that period of time.
- The product/rider, as you might expect, is generally priced at somewhere in cost between a straight annuity payment with no compound and a 5% COLA rider product. This allows for some pricing flexibility by the structured settlement planner in design as it gives the ability to get an index of up to 5%, but not having to pay the full price cost of that annual COLA product.
- The product/rider is available on both standard and impaired risk mortality.
- The product/rider is also available on structured legal fees, something I think will appeal to many lawyers and attorneys looking to defer income and also obtain some degree of market exposure on the income portion.
- The product/rider is available on period certain, life annuity and joint life annuity options. Again it is not available for lump sums or cash refund benefit options.
Obviously, there is more detail and as the rider become's officially available, Pacific Life will provide even greater specifics as needed. However, for now it is sufficient to say that the product will be an important discussion option on just about every structured settlement discussion very soon. The vast majority of personal injury victims are risk adverse, conservative individuals who can't financially handle sustained market losses or market risk. To be able to provide an index product, even with a 5% cap, while still maintaining the income tax free cash flow and guaranteed income levels that are not subject to market fluctuations, is an important innovation and one that will certainly generate a great deal of interest and premium for Pacific Life in the coming months.
