The Handbook of Variable Income Annuities

JEFFREY K. DELLINGER, a Fellow of the Society of Actuaries and a member of the American Academy of Actuaries, has over twenty-five years of experience in the financial services sector. As President of Longevity Management Corporation, Mr. Dellinger advises institutions on retirement income optimization, products, and markets. Previously, Mr. Dellinger headed the Individual Annuity Profit Center at The Lincoln National Life Insurance Company, the third largest U.S. annuity writer. While at Lincoln, Mr. Dellinger designed every individual annuity product sold. Dellinger is a Phi Beta Kappa graduate of Indiana University, with a bachelor’s and master’s degree in mathematics.

Preface. Overview.

Chapter 1: Retirement Income Basics.

A Game.

Your Retirement.

Self-Management.

Fixed Annuities.

The Game Revisited.

Fixed Annuities Revisited.

Variable Annuities.

Shortcoming of Simplified Retirement Income Projections.

Shortcomings of Traditional Retirement Income Approach.

Retirement Income Basics Summary.

Chapter 2: Annuity Categorization.

Deferred versus Immediate Annuities.

Life-Contingent versus Non-Life-Contingent Annuities.

Tax-Qualified versus Non-Tax-Qualified Annuities.

Summary.

Chapter 3: Immediate Fixed Annuity Mechanics (Non-Life-Contingent).

Approach.

Fixed Annuity Payout.

Immediate Fixed Annuity Asset-Liability Management.

Duration.

Duration Example.

Chapter 4: Immediate Variable Annuity Mechanics (Non-Life-Contingent).

Approach.

Annuity Units.

Varying the AIR.

Volatility of Variable Annuity Income.

Immediate Variable Annuity versus Systematic Withdrawals.

Reverse Dollar Cost Averaging.

Owner Control after IVA Purchase.

Chapter 5: Annuity Payout Options.

History.

Annuity Options.

Considerations in Selecting an Annuity Option.

Immediate Variable Annuity Prospects.

Value Equivalence of Annuity Options.

Chapter 6: Annuitant Populations and Annuity Present Values.

Categorization and Characteristics.

Population Mathematics.

Annuity Mathematics (Life-Contingent).

Annuity Mathematics (Non-Life-Contingent).

Annuity Mathematics II (Life-Contingent).

Alternate Derivation of Approximation Formula for Present Value of Annuities Payable More Frequently than Annually.

Continuous Life-Contingent Annuities.

Varying Life-Contingent Annuities .

Population Theory.

Mortality Improvement.

The Aging Process.

Aging Theories, Biomarkers, and Telomeres.

Force of Mortality.

Mortality Laws.

Mortality Tables.

Mortality Table Construction.

Considerations in Mortality Table Selection.

Formula-Based Mortality Tables.

Law of Large Numbers.

Life Expectancy.

Age Distribution Histograms.

Mortality Table as Survivorship Model.

Stationary Population.

Multilife Annuities.

Last Survivor Annuities.

Contingent Annuities.

Reversionary Annuities.

Last-Survivor Annuity with Pop-Up Provision.

Increasingly Important Concept in Tough Economic Times.

Chapter 7: Immediate Variable Annuity Subaccounts.

Overview of Subaccounts.

Typology of Variable Annuity Subaccounts.

Number of Subaccounts and Considerations in Subaccount Selection.

Modern Portfolio Theory.

Capital Asset Pricing Theory.

Total Market Risk versus Security-Specific Risk.

Random Walk.

Investment Risk.

Academic Research and Its Practical Implications for Retirement Income.

Chapter 8: Rate of Return.

Definition.

Early Deaths and Late Deaths.

Annuiland Example.

Rate of Return Example Using Realistic Mortality Rates.

Annuity Present Value Distributions.

Annuity Present Value Appraisals.

Benefit of Investment versus Benefit of Survivorship.

Rate of Return Methodologies.

Rate of Return and Inflation.

Deflation.

Rate of Return and Taxes.

Chapter 9: Reserves and Risk-Based Capital.

Reserves.

Risk-Based Capital.

Reserve Laws and Guidelines.

Mortality Adjustments.

Immediate Variable Annuity Reserve Calculations.

Reserve Effect Introduced by Offering Multiple Subaccounts.

Use of Statutory Immediate Variable Annuity Reserves in Product Design.

Substandard Annuity Reserves.

Insurance Company Absorbs Risks.

Risk Measures Aid in Capital Requirements.

Risk Measures.

Risk Measures and Economic Capital.

Chapter 10: Immediate Variable Annuity Taxation.

Immediate Variable Annuity Income Taxation.

Use of Immediate Annuities to Avoid 10% Penalty Tax on Premature Distributions.

Estate Taxation.

Gift Taxation.

Premium Tax.

DAC Tax.

Tax Incentives.

Chapter 11: Services and Fees.

Service Features.

Product Fees and Charges.

Insurer Perspective: Variable Income Annuity Expenses.

Chapter 12: Product Distribution.

Financial Advisers.

Distribution Chain.

IVA Pricing Optimization Process.

Wholesalers.

Sample IVA Wholesaling Story.

Unbundling.

IVA Illustrations.

Buyer Demographics.

Three-Legged Stool.

Looking to the Future.

Comparison Indexes and Disclosure.

Uncertainty.

Chapter 13: Individual Immediate Variable Annuity Underwriting.

Standard Life Underwriting.

Substandard Life Underwriting.

Chapter 14: Legal Issues.

Unisex Rates.

Separate Account Insulation.

Tontines.

Nonforfeiture Laws.

Variable Annuity Contract.

IVA Contract Provisions.

IVA Contract Administration.

Suitability Questionnaire.

Compliance Costs.

Market Conduct.

Intellectual Property.

Partial Annuitization.

Privacy.

Status of Immediate Annuities in Creditor Attachment and Assistance Program Qualification.

Chapter 15: Securities Law.

Federal Securities Law.

State Securities Law.

Organizational Structures of Variable Annuity Issuers.

Administrative Impacts.

Chapter 16: Forms of Insurance and Insurers.

Insurance versus Gambling.

Utility Theory.

Private Insurance versus Social Insurance.

Defined Benefit Pension Plans.

Types of Insurance Organizations.

IVA Company Organizational Structure.

Chapter 17: IVA Business Value to Annuity Company.

Sample Model.

Example.

Interplay of Pricing, Reserving, and Risk-Based Capital.

Immediate Annuity Value Creation.

Chapter 18: Product Development Trends.

Product Variations.

Payout Floor Guarantees.

An Introductory Lesson on Options.

Liquidity.

Income Stabilization.

Other Product Development Possibilities.

Comments on Product Variations.

Stochastic Modeling of Mortality.

Life Annuity Mortality Risk Securitization.

Proprietary Products.

Annuity Writers’ Strategic Bases of Competition.

Chapter 19: Conclusion.

Appendixes.

Quotable Wisdom Regarding Longevity.

Notes.

Glossary.

About the Author.

Index to Notation.

Subject Index.