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?