Next Up: Structured Deferred Annuities

Life insurance companies are now taking the concept of structured products and packaging them within a deferred annuity wrapper.

A structured product is nothing more than the union of an investment vehicle, offering what is commonly a long-term financial assurance, and some form of possible additional return. They are frequently seen wrapped in a registered note, trust certificate, or a not-so-traditional certificate of deposit–and what could also likely be annuities.

Typically, structured products have a maturity date of 10 years or less from purchase. At startup, the issuing company provides the purchaser a minimum guarantee, available only at maturity, plus some upside potential. The upside potential is often tied to the performance of the equity or bond market.

These recently introduced products not only allow the consumer to enjoy the benefits associated with deferred annuities–e.g., tax-deferred growth, the ability to select a settlement option, and the additional security provided by state guarantee associations–but they also are designed to guarantee a return.

The wrapping of a structured product in a deferred annuity is rather new, so the product does not yet have a common name. In this article, it will be referred to as a structured deferred annuity (SDA).

The upside potential associated with SDAs is often linked to the performance of an index. This creates similarities to indexed annuities. However, unlike many IAs, any interest credited above the minimum guarantee is available only at the end of the term period. This straightforward design makes SDAs easier to understand than many IAs presently available for sale.

Proponents like SDAs because there is a substantial likelihood the persistent policyholder will receive an amount in excess of the guarantee. Should the death benefit become payable prior to the end of the term period, many contracts will perform the extra interest calculation at that point in time. It is not currently necessary to register SDAs as they are categorized as fixed annuities.

Some critics do not like the idea of having to wait until the end of the term period before any excess interest is credited. Other products in the market address this concern, but the benefit of more frequent additional interest crediting often comes with the price of lower long-term growth.