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November 17, 2009 at 07:00 PM
Might a product that offers a guaranteed future income stream, one that can be bought at a fraction of the cost of a single premium immediate annuity, appeal to some clients? If so, then the deferred income annuity might be an option.
“Two features of the deferred income annuity make it a potentially very attractive alternative to other products,” says Curtis Cloke, a financial advisor at Two Rivers Financial Group and chief executive officer of Thrive Income Distribution System, Burlington, Iowa. “First, there is an accumulation period, which is not typical of an income annuity; and second, there is a distribution period.”
The deferred income annuity (also called a “delayed income” or a “deferred immediate” annuity) is thus a happy cross between the single premium annuity and the conventional deferred annuity. The DIA encompasses so-called “longevity insurance”–products that commonly annuitize at age 85, and sometimes in earlier years.
As with a SPIA, the deferred income annuity secures, in exchange for a single premium, a guaranteed lifetime income stream that starts at a fixed date (within the first 13 months). But like a deferred annuity, the product also provides a cash value component that grows until the income start date. At a minimum, the cash accumulation period is more than 13 months beyond the date of initial deposit.
Why is such a hybrid product advantageous? The product’s contract guarantees, low cost and the control it affords clients are three key attractions, sources say.
As with a SPIA, the income guarantee is unaffected by fluctuations in market interest rates. And like a SPIA, the contractually guaranteed rate of the DIA is based on current mortality tables and rates. The insurer can offer the guarantee because the date of annuitization is known in advance.
Contrast this guarantee with that offered on conventional deferred annuities. These products offer a guaranteed rate for an initial period, after which the client earns interest at the prevailing market rate or the minimum guaranteed crediting rate, which typically is 1.5% or 2%, observers say.
As for costs, the DIA’s future guaranteed income requires a substantially lower outlay than that required of a SPIA.
“Depending on the desired death benefit, clients can insure the tail [income during the final retirement years] with perhaps 15% to 20% of their investment portfolio,” says Rich Lindsay, a senior vice president at Symetra Financial, Belleview, Wash. “By comparison, a SPIA could require 65% or 70% of a portfolio to achieve the same result.”
