When it comes to lifetime income planning, your clients are always looking for the latest and greatest strategy to ensure that their income needs will be met during retirement. Deferred income annuities are finally experiencing a dramatic growth spurt in the market, which has motivated insurance carriers to design products with features that allow each product to be tailored to meet the individual client’s needs. As the number of carriers offering deferred income annuities expands, a corresponding boost in client demand is expected — especially when clients discover that they can find the income features they have come to expect from an annuity product, but with a level of flexibility in required contributions and income options unique to the deferred income annuity market.
Deferred Income Annuities
Originally, deferred income annuities were meant to be purchased as a safety net that would kick in to provide a stream of income once the client reached old age (typically around age 80 or 85) in order to ensure the client did not outlive his retirement savings. However, in the past two years, insurance carriers began taking a broader approach by offering deferred income annuities that could begin payouts much earlier in the client’s retirement, perhaps deferring income only for a year or two before payouts begin.
While many clients liked the idea of the deferred income annuity, it is only recently that they have become more widely available, offering features that extend far beyond the basic annuity payment structure.
The New Deferred Income Annuity
Deferred income annuities now often offer features that make them much more flexible than the traditional annuity product, opening the market to a wider range of clients. For example, while a traditional annuity will usually require the client to make one large lump sum payment to purchase the annuity, many deferred income annuities allow the client to make multiple contributions. This lets the client spread the purchase over a period of time prior to the income starting date, which can alleviate some of the downside risk of locking a large portion of his savings into the contract with no expectation of a return for several years.
Further, while deferred income annuities can provide for an income starting date in as few as 13 months and as far into the future as 45 years, many of these products now allow the client to change the date originally chosen. This gives the client flexibility as circumstances change over what can be a protracted accumulation period.
Along the same line, many deferred income annuities also protect against inflation risk by providing for cost of living adjustments (COLAs) that can give clients certainty that their income needs, which are inherently difficult to anticipate, will be met, even if the annuity starting date is as far as 45 years into the future.
As with many traditional annuities, insurance carriers have begun to offer enhanced liquidity features in conjunction with deferred income annuities to protect clients from the risks that they will eventually need the funds they have locked into the annuity contract prior to the income starting date. These options include accelerated payment options (such as the ability to start the annuity payments earlier than originally planned), but also allow the client to access the commuted value of his annuity payment stream if the funds are needed in a lump sum.
While deferred income annuities still represent a relatively small segment of the market—recent studies show that about 12 companies currently offer the products, up from only six in 2012 — demand for these products is growing rapidly. As the market continues to expand, it’s probable that product offerings will also expand to meet the needs of even more clients’ retirement income goals.