Insurance is not just there to help with bad events, it’s there to plan for good ones. Most importantly, retirement planning. Insurers have suffered significant financial losses in the recent low interest rate environment on sales of traditional annuity product that there is now a major wave of innovative new products including what I believe are the most promising: the structured note annuity.
Insurance companies annuities that take a single payment and turn it into a future income stream with substantial guarantees and riders. These annuities are great ways to save up for retirement since the customer gets a minimum return each year plus any excess returns generated by the market and, often, a bonus on their initial premium paid. Great for policyholders but insurers take a financial hit on these products and this causes them to be less willing to sell them.
Structured Note Annuities Structured note annuities are a business in it’s infancy and are based on the current concept of structured notes as sold in the banking system. The elements of a structured note are
- A set term for the contract, for example 5 years.
- A participation percentage in an investment index or group of indexes. For example a structured note might guarantee the buy a return of 120% of the S&P 500 index
- A maximum amount of investment income that will be allocated to the customer each year. For example there may be a 40% max each year, so if the S&P index increases 35% in on year, so at a participation percentage of 120% then the customer is entitled to a 42.5% return, however because of the maximum the customer will get only 40% for the year. So the upside potential is limited.
- A buffer specifying the amount of market losses that will be absorbed by the bank. For example the note could have a 10% buffer, meaning that the first 10% of market losses will not be allocated to the policyholder. If the market drops by 5% in one year than the value of the note will drop by 0%. However, with the 10% buffer, if the market drops by 15% in a given year the note’s value will drop by 5%. This is essentially a deductible that limits the downside potential to the consumer.
Potential As An Insurance Company Product
AXA and MetLife are already utilizing structured note type features in some of their products. The advantage of buying such a product from the insurance company is that at the end of the structured note’s term the customer can convert their account value into an annuity or roll it over into a new structured note at a tax advantage that a bank does not enjoy. So far structured note annuities are targeted to high net worth individuals but are working their way into general circulation and could be the annuities that we and our children will be buying a few decades from this article’s publication.