In a previous post I discussed the sales boom in deferred income annuities (DIAs). Part of the products’ appeal to clients is their relative simplicity, at least when compared to variable annuities’ income benefits.
But that simplified product design doesn’t mean you can stop your analysis by picking the DIA with the highest payout rate. Clients will value some contract benefits more than others, which means matching up their preferences with the right product. Also, as the number of available DIAs grows—the count is up to 16 issuers as of mid-May—the competition is heating up and insurers are introducing a broader range of contract features.
I recently spoke with Burlington, Iowa-based Thrive Income (www.thriveincome.com) CEO Curtis Cloke, CLTC, LUTCF, RICP about what he’s seeing in the DIA market. Cloke, who’s also a MDRT member, started using these annuities in 1999 and frequently speaks to industry groups about their planning applications. Here are some of the key product trends he’s monitoring.
Payout options. Very few clients opt for a life-only DIA in Cloke’s experience due to concern over the risk of premature death and the subsequent payment stoppage. That means advisors must evaluate the contracts’ payout options: installment refund, cash refunds or a lifetime payment combined with a level period certain.
COLAs. The second feature Cloke reviews is the cost-of-living-adjustment (COLA), which he almost always includes in the contracts he sells. He views the feature as useful in offsetting clients’ variable sources of income in addition to providing inflation protection. Specific COLAs vary. Most allow clients to specify a contract value—1 percent, 2 percent, etc.—and two products allow buyers to specify a consumer price index-linked adjustment.
Commutation options. This is a liquidity feature allows the buyer to remove funds pre-annuitization. Cashing out prematurely imposes a cost; nonetheless, the presence of this feature reassures buyers, says Cloke: “(The feature) allows people who wouldn’t otherwise consider such a purchase to be able to emotionally hurdle over that decision and actually purchase that as an income floor versus something else.”
DIAs are a dynamic market; Cloke says he sees significant differences among the carriers’ offerings. Contract features change, too, as carriers target specific market segments in an effort to diversify their book of business. Cloke uses CANNEX Financial Exchanges Limited, an annuity data provider headquartered in Toronto, Canada, for updated DIA contract benefit information.