What is a Stand-Alone Living Benefit? Guaranteed Income Without an Annuity?

I was intrigued when I came across a product called a Stand-Alone Living Benefit (SALBs) which promises lifetime income without having to actually buy a fixed or variable annuity.  It is often said that necessity is the mother all invention and so with more and more baby boomers changing their strategy from accumulating assets to spending their assets I believe more products like this one, (as well as more traditional insurance based products), will become more popular.

What is a Stand-Alone Living Benefit?

Like almost all insurance based retirement products the basic idea is pretty simple.  The product is shifting the risk from you to the insurance company that your portfolio will always have enough assets to provide a set income stream.

A recent article from AdvisorOne explained an SALB a bit more eloquently,

SALB offer a guaranteed stream of income without purchasing a traditional annuity. The product acts like an insurance policy on an investment account, with income benefits kicking in if the account is depleted during the insured’s lifetime. The product is sometimes referred to as a “hybrid annuity” product, although it is not an annuity in the traditional sense.

Here is how they work. The investor places assets in an investment account that is eligible for coverage by SALB. The SALB provide a 4% to 8% lifetime income guarantee, calculated over the Retirement Income Base–essentially the account value–in place when the SALB are purchased.

It is amazing (and very alarming) how little information is available online about these products.

Positives Associated with Stand-Alone Living Benefit Products

The main positive for the purchaser is that it  allows an individual to shift the risk without buying an annuity.  This is important because many fee only financial planners won’t sell an annuity due to the commission structure which is in direct violation of the way they get paid.  Writing this post, I preemptively loath the expected comment which will inevitably say, “I hate annuities because of fees.”  Annuities have a very negative connotation but I am actually a pretty big fan of them despite not owning any yet. 

Another positive about a SALB is that you participate in the upside of the market but not the downside. From that same article,

if  an investor purchases SALB on an account with a Retirement Income Base of $500,000 and a 5 percent guarantee, the SALB promises that payments of 5 percent of the $500,000 base, or $25,000, will be available annually for the insured’s lifetime, starting at 65. Then, if the account value drops to zero, the SALB will continue to make those $25,000 annual payments for the insured’s lifetime.

Guaranteed income can increase annually if the value of the account increases, giving clients access to market upswings while still protecting them from downturns. For example, 5% SALB on an account worth $500,000 would pay $25,000 per year, but if the account value jumps to $600,000, the guarantee will jump to $30,000 per year

Negatives Associated with a Stand-Alone Living Benefit

Considering you are shifting risk there will always be a cost.  The article linked above discusses product which charge 75 to 200 basis points on top of whatever the investment advisor is charging.  Ironically, this is often the charge for many annuities and thus it seems that this is just a justification for a fee based planner to sell an annuity-like product.  The fee is high, but considering you are guaranteeing an income stream against market losses – seems reasonable.

Imagine buying this product in January 2006? You would have been sitting very well.

Another negative about the product is that there is likely to be restrictions on trades made in the account associated with the benefit.  The restrictions make sense, they are insuring against loss on portfolio Y if you make any changes then their actuarial risk would change.  Alternatively, some products will force you to invest in predetermined asset allocations/investments.

Stand-Alone Living Benefit Disclosure

I do not own an account that has this benefit.  To be honest as I wrote this post and discussed the pros and cons of the Standalone Living Benefit it really just seems to be an annuity disguised in a managed account so the fee based planner can use it.  Again, that isn’t a bad thing!

That being said, maybe a reader can help me out and tell me what I am missing? Would you consider buying the product?

8 Responses to What is a Stand-Alone Living Benefit? Guaranteed Income Without an Annuity?

  1. Hi Evan.

    I have yet to see such an “add on” product that comes with inflation-adjustments. Have you seen one?

    The way I see it, the primary purpose of a lifetime annuity is to get safe lifetime income. And for it to be safe (in terms of guaranteeing a certain standard of living), the inflation adjustment is a necessity.

    Granted, the inflation adjustment on lifetime annuities is expensive as heck. But that’s because it shifts a significant risk to the insurance company — and that’s the whole point.

    • Considering the risk an insurance company is taking on for an SALB or an Annuity I would say the fees aren’t that bad.

      Every annuity has an inflation rider, but I did not see any SALB add on products that advertised an inflation rider. Notwithstanding, since I am almost positive this product IS AN ANNUITY…it can’t be far behind if the product picks up steam with Fee only advisors.

      • Yeah, but… Doesn’t it sound an awful lot like an annuity without an inflation rider?

        Like you, I’m wondering what I’m missing here. Only advantage I can see (tho’ admittedly am prob’ly not looking hard enough…) is that it proposes to continue providing an income if you run out of money. What if the outfit issuing these things goes belly-up or for some other reason decides to get out of this business (along the lines of, say, the companies that sold us long-term care insurance some years ago are trying to get rid of us now)?

        Interesting.

  2. I see no point in an annuity as long as there are no load monthly income funds out that that will return a steady 4% to in some cases up to almost 8% every month. What is the point of locking yourself up in a product that you might think is right for you today but nearly impossible to break out of down the road if your life changes.

    • 8%? What ticker is that?

      Even if it were common, an annuity or this product has the added benefit of shifting some of your risk to an insurance company.

  3. I’m in Canada so I couldn’t advise you of a similar fund in the US. But for me :

    TDB298 is one. Another is BMO148. If you simply want a monthly yield back these have a high return . I have an odd strategy. I have these funds pay out in cash every month in a sheltered account then I pick & purchase individual stocks with the payout every 2nd month. (Sometimes when I see the fund unit price is down sometimes I buy more units of the fund then I use that as my RRSP contribution as well).

  4. What happens if there is a crash? Or another big recession? How does that impact SALB? Does one really need it I ask myself and if so why?

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