January 26, 2016

An investment in an annuity, possibly combined with a HECM reverse mortgage, can make a lot of sense to a retiree, as I noted in How Retirees Can Avoid Running Out of Money: The Role of Longevity Annuities. Retirees planning to draw down financial assets over their remaining life, who also have equity in their primary residence, could use a credit line on a HECM reverse mortgage to pay for a longevity annuity – one that does not begin payments until some specified time in the future but runs until the annuitant dies. The longevity annuity would increase monthly cash flow, eliminate the risk of running out of assets to liquidate, or both. Retirees dependent on monthly pension income could supplement it by either drawing a tenure annuity under the HECM, which runs until the owner dies or moves out of the home permanently, or by drawing a lump sum under a HECM credit line and using it to purchase an immediate annuity – one that begins monthly payments immediately and runs until the annuitant dies.

But annuities, like HECM reverse mortgages are very complicated instruments, which poses the danger of over-charges and, even worse, misinformation leading to bad choices by the retiree. This raises the question of whether purchasing an annuity on-line is a way to avoid these risks. This article is directed at that question. I have no financial interest in any annuity sites.

Criteria For Evaluating Internet Delivery

Web sites that improve a market from a consumer perspective do three fundamental things. First and foremost, such sites provide competitive pricing, which means that they collect complete price data from multiple service providers, and organize it in ways that allow consumers to find the best deal for the particular option they want. To do this effectively, the prices shown must be live, fully adjusted for variations in the product or service, and inclusive of all charges made by the vendor. This allows the consumer to make apples-to-apples comparisons of the prices of different vendors. This is what I did in creating a home mortgage and reverse mortgage site, and it was the most important feature I looked for in evaluating annuity sites.

In addition, a market-improving site informs users whether or not they are likely to benefit from the product or service being sold. The more exotic and complex the product, the greater the need for useful information regarding the type of users who would benefit from it.

Finally, a market-improving site provides useful information on which specific options of those being offered are most likely to meet the consumer’s needs. There are many types of annuities just as there are many types of mortgages, and the useful site provides information a consumer can use to help make the right selection.

General Purpose Annuity Sites

Among the web sites I looked at that offered price quotes from multiple insurance companies on a wide variety of annuity types, the standout was www.immediateannuities.com. For the transaction I defined for them, they gave me the monthly income that would be paid by each of 9 companies, and the credit ratings of each company from each of 3 credit rating agencies. They also showed me important differences in the contracts used by the 9 companies, but only in very summary form, raising questions in my mind for which no answers were provided on-line. I would have appreciated more detail on this important topic, but the site prefers to counsel users one-on-one. Presumably for the same reason, the site does not attempt to match the diverse needs of consumers with the wide range of annuity types, or with options within types.

A Specialized Longevity Annuity Site

Www.myabaris.com  is a relatively new site focused strictly on longevity annuities, with particular  emphasis on “qualified longevity annuity contracts” or QLACs. These are contracts that when placed in a tax-deferred IRA or 401(K) account, are exempt from the required minimum distribution rule that disbursements subject to tax must begin from the fund starting at age 70 ½. Under a Treasury ruling in 2014, income from QLACs does not have to be drawn (and taxes paid) until age 85. Individuals can invest in QLACs up to $125,000 or 25% of total account value, whichever is less.  

Abaris meets all three of the criteria stipulated above for improving the annuity market. It provides competitive pricing by the 7 insurers that participate on its site. Furthermore, instead of just warning users about contractual differences between the insurers, it allows users to set the contractual features so that they are uniform for all the quotes. In addition, Abaris provides a rough-cut listing of consumer features that “Might Be Right For a QLAC”.

While this site still has a lot of rough edges, the basic design is analytically solid and consumer friendly.