Introducing Protected Lifetime Income Benefits (PLIBs): Part 1

Despite more than a half century of research detailing the potential value of guaranteed lifetime income products for retirees, sales of annuities, especially traditional products such as single premium immediate annuities (SPIAs), remain low. There are theories to explain why this “annuity puzzle” persists, but one notable barrier to annuitization is the irrevocable transfer of the premium common among annuities.

A product that addresses this concern, which has been available since the 1990s, is an annuity with a guaranteed lifetime withdrawal benefit (GLWB) feature,1 which is common with both variable annuities (VAs) and fixed indexed annuities (FIAs). These products guarantee some minimum level of lifetime income even if the underlying account value goes to zero.

GLWBs have recently come out of favor among some insurers, with a growing number of companies exiting the business. In response, new products are being introduced where the guaranteed income amount “evolves” during the payout phase based entirely on returns of the account, a product I refer to as a “protected lifetime income benefit” (PLIB). While similar to GLWBs, the PLIB is categorized separately because the way the income changes is materially different and can decline. The PLIB concept is not new, with tontines being one of the earliest examples of products that provide protected lifetime with a form of “shared” risk exposure.

In this series, I will: introduce the PLIB framework (part 1); contrast the efficacy of a variety of longevity protected solutions, in particular a SPIA, DIA, GLWB, and PLIB (part 2); provide context as to why PLIBs end up doing so well in the analysis (part 3); and finally provide some context on the optimal risk levels for PLIB strategies (part 4). This series is based on a larger research paper, available here.

GLWBs and PLIBs: An overview

Early research on the potential benefits of annuitization focused on more traditional, relatively simple guaranteed income products such as SPIAs, also referred to as immediate-fixed annuities. Despite the potential benefits of SPIAs and annuities in general, they remain relatively unpopular among retirees, an effect commonly dubbed the “annuity puzzle.”