The cash flow stream of a fixed payout may not keep pace with inflation, particularly for longer-term payout phases such as a life annuitization.
In addition, annuitants may recognize less taxable income during the payout phase, due to the partial recovery of basis associated with each payment.
"As the populations are aging, as those books of business start moving toward the payout phases
of that risk, and as individuals are demanding or interested in more longevity risk product types of offerings, insurers are going to need to understand the diversification better, not just from a pricing perspective, but also from an economic capital perspective," Silverman said.
However, the companies that manage the accumulation as well as the payout phases have an advantage.
In the payout phase, the product has to be like a tripod.
Financial professionals who have developed accumulation programs for these clients now need to focus on the payout phases
The "exclusion ratio" is expressed as a percent-age (10) and applies to each annuity payment equally through the payout phase. For instance, assume a 70-year-old purchases an annuity.
If the payout phase of the annuity is a life annuity, the company promises that payouts will continue for as long as the annuitant (or annuitants) live; the income stream can never be outlived (NOTE: although often the same, technically the owner of the annuity does not necessarily need to also be the annuitant; occasionally these are different individuals).
In return for making a deposit into an annuity, the insurance company ultimately agrees to pay the owner (or owners) a specified amount (the annuity payments) periodically, beginning on a specified date--this is the payout phase of the annuity.
An immediate annuity only has a payout phase; a deferred annuity has both an accumulation and a payout phase.
If the payout phase of the annuity is a life annuity, the company promises that payouts will continue for as long as the annuitant (or annuitants) live the income stream can never be outlived.
Newer annuities may also offer a variable option during the payout phase (whether for a fixed or term certain period).