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DIAs: The ‘income later’ option

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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.

Unlike a variable annuity that is bought with a GLWB rider that may or may not be activated, DIAs are “definitely purchased for the income,” Alexander stresses. Of all the various annuity options that can provide guaranteed lifetime income, DIAs typically offer the most monthly income for policyholders since the insurer controls the annuity owner’s money for a longer period. Unlike previous versions, current DIAs offer a bit more flexibility as to when an owner can stop and start payments, Alexander says.

Alexander likens DIAs to longevity insurance, or a product that would kick in at an advanced age. “Good idea in theory, but we Americans tend to be impatient and are not into delayed gratification so the classic longevity insurance never sold very well,” she says. “Now, these DIA products are generally sold to someone who says, ‘I’m planning to retire at age 65. I’m 60 now. I buy a contract and I expect to begin to take income in five years.’ ”

Lucrative market

For carriers, retiring baby boomers represent a lucrative growth market. But in a low interest rate environment that is causing may insurers to rework product features or jettison the annuity business outright, why enter this market even backed by positive demographics?

According to Alexander, they may be betting interest rates will eventually rise, making these annuities more profitable in the future.

That is a more attractive bet for mutual companies, like MassMutual and Northwestern, that can look well beyond quarterly earnings and have a more long-term view. Both companies also have a substantial foundation in whole life insurance, making DIAs a natural hedge against that product, Alexander says, adding that she expects more carriers to launch DIA products in the coming year.

“Insurance companies in general are picking where they want to play,” Alexander says. “Some are not abandoning the retirement income market because the demand is so attractive. It’s hard for insurance companies to grow. Obviously, you are going to be able grow when playing in a growth market.”

Michalowski further points out that low interest rates have not dampened sales of annuities, of all types, as buyers seek guaranteed income for their retirement. With other fixed income products like CDs and bonds not offering much in the way of investment growth, income annuities can provide an efficient and guaranteed income stream. “With more people approaching retirement, it seems to fit,” he said.

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