Deferred income annuities (DIAs) are hot. According to Windsor, Conn.-based LIMRA Secure Retirement Institute, total annuity sales in 2013 reached $230.1 billion, an increase of 5 percent of 2012.
Drill down in the data and you’ll find a surprising stat: the DIA category showed the strongest year-over-year percentage growth, up 113 percent. That result is somewhat misleading because the increase was based on a very small 2012 base value of $1 billion.
Nonetheless, DIA sales doubled to $2.2 billion in 2013 and sales continue to grow rapidly. “It’s certainly one of the faster growing, if not the fastest growing annuity category,” says Ross Goldstein, managing director, retail annuities with New York Life in New York.
So what’s driving the market? Joe Montminy, assistant vice president, LIMRA SRI Annuity Research, points to several trends in an email response.
First, there are nearly 52 million Baby Boomers (age 50 to 65) close to retirement. LIMRA SRI research has found that 4 in 10 pre-retirees would consider annuities to help meet their basic living expenses.
Second, when you look back at the annuity market 6-8 years ago, there was much less focus on income solutions than there is today. Variable annuities, index annuities, and deferred income annuities have all incorporated features or riders that can provide income to individuals later on when they plan to retire.
DIA sales have also grown because there are now more companies offering them, he adds. In 2011, there were only 3 companies offering DIAs. By the end of 2013, that more than tripled to 10 companies.
The economic environment in 2013 benefited DIAs, especially in the second half of the year. Rising interest rates and a steeping yield curve permitted companies to obtain more favorable pricing and made DIAs’ more attractive.
The average buyer of New York Life’s product has been about 58 years old with roughly a nine-year deferral period, says Goldstein. The dwindling number of employees in that cohort covered by defined benefit plans partly explains the deferral period being chosen.
“I think people are trying to either recreate pensions or pension-like income streams if they don’t have them or if they do have a pension, they’re just trying to make it larger,” he says. “There’s something very attractive about having a guaranteed income stream you can’t outlive.”
The outlook for DIA products is good, Montminy says. Interest rates are expected to rise throughout 2014 and that will help to grow DIA sales. In addition, it’s becoming a more competitive market. New insurers are entering the market and others have revamped their offerings to be more competitive. When LIMRA SRI looks at DIA and SPIA sales together, the organization expects the products’ combined sales to more than double by 2018, he notes.