Solving the Decumulation Dilemma

David Blanchett

And there may well be other considerations regarding technology, aggregation, and tracking.

Additionally, the advisor may not be able to easily bill for their services in some annuity structures. That may be the case if, for example, they are fee-only. Yet the unprotected nature of systematic withdrawals leaves clients open to various risks in retirement, notably longevity risk and sequence of returns risk.

Insurance overlays have the potential to directly address most, if not all, of these challenges. They offer a protected systematic withdrawal strategy that adds a layer of protection onto their managed account during decumulation.

The assets do not have to be transferred to the insurance company: They remain custodied with the financial advisor, who is able to continue to manage and bill the portfolio as they have always done.

While the income generated from insurance overlays — and the associated fees — varies by product, the income benefit can be generalized such that if the portfolio is exhausted while the retiree, or retirees, is still alive, the retiree will continue receiving income for life, based on the provisions of the particular product.

The insurance overlay income benefit could be structured as a guaranteed lifetime withdrawal benefit, or GLWB.

Even newer approaches allow the income to evolve throughout retirement based on the ongoing performance of the portfolio, a strategy referred to as a “protected lifetime income benefit,” or PLIB, in some recently released research.

Some of these products will offer spousal benefits that can cover income for two lives.

Generally, there will be some restrictions on the underlying portfolio allocations as part of an Insurance overlay, especially for income products with more explicit guarantees (e.g., GLWBs).

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While most investments and asset classes used by financial advisors are likely to be fine within a CDA structure, more exotic asset classes that challenge the insurance company’s ability to hedge may not be available (for example, no crypto).

Regardless, the structure can create significantly more freedom around the investments than a more traditional approach to lifetime income for some financial advisors by enabling them to remain in their investment models and maintain a more scalable investment approach.

Certainly, the fee associated with an insurance overlay creates its own drag on portfolio longevity.

But the features for Insurance overlays come at a cost, which is fundamentally different than other expenses like investment management, and the fee is an ongoing expense compared to a one-time decision.

What’s Next?

Creating efficient retirement income strategies will, of course, require greater access to a variety of insurance overlay products and solutions.

Today, technology innovations have brought exciting new advances to the world of protected lifetime income, and those innovations may soon make adding overlay protection to a managed account as easy as clicking a button to add trip insurance to a vacation reservation.

The good news is that we are beginning to see overlays appear within broker-dealer managed account programs, and on familiar distribution platforms such as Envestnet and FIDx.

The largest hurdle in the past was that financial advisors had to jump through hoops to secure protection for their clients.

But now that there are APIs, middleware, and end-to-end digital experiences available in the marketplace. In the not-too-distant future, insurance overlays could help financial advisors easily bring longevity protection options to their clients.

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