DIAs: The ‘income later’ option

Two recent annuity launches provide a telling sign of where the retirement income market may be heading. At a time when several annuity providers, particularly in the variable annuity space, are either scaling back features or exiting altogether, both MassMutual and Northwestern Mutual unveiled deferred income annuities (DIAs) in the past two months.

There are a number of reasons behind these moves, not the least of which is the tidal wave of baby boomers either nearing or in retirement, giving insurers comfort there will be future demand for the products. Many boomers are entering their golden years without the pensions their parents depended upon; therefore, they seek an income solution that can cover their fixed expenses during retirement. Further, they must plan for the probability of longer lifespans.

“There is a huge demand for retirement income by the big wave of baby boomers that are retiring, many of them without the pensions their parents had,” says Judith Alexander, director of sales and marketing for Beacon Research, which tracks annuity sales. “These are very insecure times and people really want guaranteed retirement income of some kind. And annuities are the only way to provide it other than Social Security, which is really an annuity when you think about it.”

Beacon began analyzing deferred income annuity sales as a separate category just this year. In second quarter, reported DIA sales reached $202.7 million, up roughly $47 million from the first quarter sum of $155.4 million, according to Beacon’s Fixed Annuity Premium Study. Actual sales could be higher, Alexander says, because not all DAI issuers report DIA sales separately to Beacon currently.

“Pension envy”

Behind that sales surge is a concept David Simbro, vice president, and senior vice president, life and annuity products, at Northwestern Mutual, characterizes as “pension envy.” In other words, baby boomers have more personal responsibility for generating their retirement income than their parents did. “Baby boomers don’t have the same guaranteed income streams their parents had as it relates to pensions,” Simbro explains.

Earlier this month, Northwestern launched its Select™ Portfolio Deferred Income Annuity. This latest product allows policyholders to boost their income by taking non-guaranteed dividends. It does not, however, permit an owner to cash out the annuity and receive a lump sum. That, in turns, enables the insurer to invest the proceeds over a longer time frame and maximize investment performance. “It purposely sets up that tradeoff for the consumer to maximize its efficiency as an income stream generator,” Simbro says.

Northwestern has another deferred income annuity that sets the exact income stream at purchase. By contrast, its latest DIA offers a lower guarantee, but more upside potential, Simbro says.

Now playing in the DIA market as well is MassMutual with its RetireEase Choice™ product. The insurer already had a foothold in the “income now” marketplace with a single premium immediate annuity, or SPIA. With this latest product, MassMutual has entered what Phil Michalowski, vice president of annuity product marketing for MassMutual, terms the “income later” arena.

The product is specifically targeted toward those baby boomers, usually in their 50s to early 60s, who don’t want to wait until they actually retire to start securing a secure source of retirement income. “This is where that income later solution allows you to expand your market and provide some solutions to folks as they start to identify what their needs are and how they want to fund their sources of retirement income,” Michalowski explains.