A deferred income annuity, or DIA, is a newer type of annuity that is essentially cross between a single premium immediate annuity and a single premium deferred annuity.
That is the definition that Curtis V. Cloke provided here during the annual retirement industry conference sponsored by LIMRA, LOMA and the Society of Actuaries. Cloke, the founder and chairman of Thrive Income Distribution System LLC, Burlington, Iowa, and two other executives detailed how DIAs can be used to fill gaps in a client’s retirement income plan.
The traditional SPIA typically begins paying an income stream within 13 months of deposit, and it makes these payments for either a designated period or for the lifetime of the annuitant, said Cloke, adding that it has no traditional cash value.
A SPDA, on the other hand, offers an income option inside the contract, he said. Its payouts are based on conservative factors, and rate and guarantee are the primary focus of the contract, he said.
By comparison, a DIA sits between these products in that it allows income payments to be deferred from over 13 months to typically 50 years, Cloke said. Like the SPIA, its payout can be designated for a certain period or for the lifetime of the annuitant, and the policy has no traditional cash value, he added.
When the DIA is written with a designated income period, “the known value for the income stream allows a precise rate of return–the IRR–calculation of deferral and distribution,” Cloke pointed out. “The same IRR applies during deferral and distribution phases.”
Also, such a DIA “retains full value of the income assets for the heirs, because the designated payments are guaranteed.”
Cloke showed some examples indicating that a client who needs a certain amount of retirement income for a certain period would pay a smaller single premium under the DIA to do that than under a traditional SPDA that is annuitized for the same designated period.
That could leave assets in the portfolio that can be used for other purposes, he indicated.
Also, the monthly income from the DIA could work out to be higher than that of the income from the annuitized SPIA, one example showed.
Right now, only a few companies offer the DIA product, said Garth Bernard, president and chief operating officer of Thrive Income Distribution System, LLC.
The products are relatively unknown, he allowed, but he predicted that advisors will start to pay attention when they understand what the DIA does, not just what it is. “You have to give them a frame of reference, such as referring to the IRR.” It also helps to show the impact of, say, deferring income for 5 or 10 years, Bernard said.
As for engaging the client, he said the key is to “show what the DIA does for the client and (connect it to) what the client knows and is concerned about.”
When the client and producer get it, Bernard said, “it’s an easy sale.”
It can be a challenge to describe the characteristics of products that are “out there” in terms of new product design, pointed out Brian K. Williams, chief operating officer of Financial Independence Group, Cornelius, N.C.
When working with baby boomers, Williams said, the important thing is not to be product centered. “Take the discussion to the retirement goals of the client and then develop a plan, and put products in place” for that plan.
The sale can be paired with other products, including those with guaranteed minimum withdrawal benefits and annuities offering longevity insurance, and it can be layered on top of a client’s Social Security and other fixed income, Bernard added.