At a time when many life insurers are scaling back or eliminating product guarantees because their balance sheets are strained, many advisors will be heartened to learn that one product boasting an attractive combination of guaranteed income, high rate of return and tax advantages is becoming more widely available: the deferred income annuity (DIA). And judging from the assessment of the DIA’s proponents, the product is sure to be a big seller in coming years.
“We anticipate exponential growth in DIA sales over the next 5 to 10 years,” says Curtis Cloke, CEO and founder of Thrive Income Distribution System and an advisor at Two Rivers Financial Group, Burlington, Iowa. “In our practice, revenue is up by 30% to 40%. There is now greater acceptance of the product than in past years.”
Cloke is not alone in his upbeat outlook. Ross Goldstein, a corporate vice president for New York Life, New York, says that sales of the company’s DIA, dubbed Guaranteed Future Income Annuity, have reached $500 million in less than a year after the product’s launch.
What’s fueling the demand? Cloke, Goldstein and others point in part to the product’s defining feature: the ability to lock in a guaranteed future income stream at the time of purchase. Like a single premium immediate annuity, the client invests a lump sum up front. The difference is that payouts begin more than 12 months thereafter. Indeed, many DIA buyers elect to withhold distributions for 10 to 20 years or longer.
The DIA’s hybrid design—the product has attributes of both a conventional deferred annuity used for asset accumulation and an immediate fixed annuity used for income—yields for the policyholder an attractive combination of benefits, say experts. Among them: protection against fluctuating interest rates; more tax-efficient distributions than conventional deferred annuities; and superior payouts when compared to alternative retirement vehicles.
“Deferred income annuities offer consumers more income than other asset classes because of exposure to longer duration bond portfolios and interest compounding, and more exposure to mortality credits,” says Goldstein. “As a result, deferred income annuities offer the potential to generate as much as 30% more guaranteed income than the most popular alternatives, enabling consumers to get more out of their retirement income strategies.”
“I’ve run numerous comparisons between fixed income annuities with income riders, variable annuities with income riders and the DIA, and I’ve found the DIA requires less money to fund someone’s retirement than these other solutions,” adds Bruce Widbin, an agent with Two Rivers Insurance Services. “Because they require less money to guarantee clients retirement income, more assets are freed up to invest in the market or other vehicles to give clients complete, unfettered liquidity.”
A growing number of annuity carriers are entering the nascent DIA market. In addition to New York Life, the current players include American General, MetLife, Presidential Life, Prudential Financial, Symetra, and Forethought Financial Group, a manufacturer of fixed and indexed annuities that bought Hartford Financial Services Group’ annuity portfolio in April. As new providers have entered the market, sources say, the products have evolved to offer policyholders more flexible income distribution options.
Gone are the days when clients were limited to buying products that only begin distributions at an advanced age (e.g., 85). Providers have also moved beyond life-contingent annuities that pay an income for life, but then stop payments at the annuitant’s death, leaving nothing for heirs.
Among the current crop of solutions are products that offer period certain payouts, such as for 10- or 20-year terms; products that offer beneficiaries a death benefit in exchange for a reduced income to the annuitant; products that can start and stop distributions to accommodate a client’s altered financial situation or objectives; and products that offer flexible premium options.
Consider New York Life’s Guaranteed Future Income Annuity. The solution lets policyholders make a small initial investment and then subsequent investment contributions any time during the deferral period. They also can select the date—from two to 40 years in the future—to begin receiving income. And they can customize the payment stream to include another annuitant, legacy/beneficiary options and inflation protection.
The last, says Dylan Huang, a corporate vice president and actuary at New York Life, addresses an issue commonly raised by critics of fixed annuities: that the products often fail to keep pace with cost of living increases. Absent inflation protection (whether built in to the product or purchased as an rider), policyholders can rely on another feature to compensate for rising costs: mortality credits. Resulting from the reapportionment of contributions to an annuity pool—as annuitants die, payouts are divvied up among a diminished number of surviving annuitants—these mortality credits are higher in DIAs than in conventional deferred annuities because of the DIA’s greater illiquidity.
“Deferred income annuities offer more income than most, if not all available income products, but the higher income comes with a cost,” says Huang. “After purchase, there is limited liquidity, which leads to more mortality credits, and if the client uses funds that were previously invested in the market, they will no longer benefit from market upside. However, a cost of living adjustment option can provide more income in later years.”
Adds J. Todd Gentry, a financial services representative for New York-based MetLife: “The primary advantage over most alternative products is the shared mortality risk that is achieved through the purchase of a deferred income annuity. The mortality credits a client receives helps them reach their planning objectives where, in my opinion, alternative [annuities] do not effectively hedge that risk in most cases.”
The enhanced flexibility available in DIAs may be more appealing to clients than the pioneering products of recent years. But observers note this entails trade-offs that consumers have to weigh.
Take, for example, the death benefit available with some of the new offerings. Prospects may be hesitant to buy a life contingent DIA that cuts off income payments at the death of the annuitant. But adding a death benefit, as noted earlier, reduces the payout and, thus, the greater leverage a client can achieve by maximizing distributions on the invested principal.
The payouts on life-contingent annuities without a death benefit can indeed be substantial, particularly on those products that begin distributions at an advanced age. Case in point: MetLife’s DIA: the MetLife Investors Longevity Income Guarantee. MetLife’s brochure for the LIG product show that a man who invests $50,000 in the annuity at age 50 will receive $42,997 annually starting at age 85.