A flurry of regulatory activity has put deferred income annuities (DIAs) in the spotlight frequently in the past year, with many billing DIAs as the up-and-coming option for clients to ensure sufficient income even at an advanced age. Often overlooked, however, are the DIA product features that insurance carriers have recently developed in order to appeal to a younger generation of annuity purchasers.
Because of these newly developed options, DIAs today can provide protection against longevity risk through guaranteed income products that have previously been unattractive to the younger client—opening up this retirement savings avenue for an entirely new group of clients.
Flexible Payment Option DIAs
Much attention has been drawn to DIAs in recent months as a preferred method of insuring against the risk of outliving retirement savings because of increased longevity—a risk that could be even more hazardous to younger generations because of constant advancements in medical technology. Fortunately, insurance carriers have taken note of the DIA trend and have developed flexible payment options in order to appeal to this younger clientele.
Many insurance carriers have significantly lowered the initial required premium on some of their DIA products in order to make these products affordable to clients who have yet to accumulate substantial retirement nest eggs.
These products then give the client the option of determining subsequent contribution levels on a monthly, quarterly, semi-annual or annual basis—with some products allowing ongoing monthly contributions that are as low as $50.
While some clients intend to make annual contributions that approximate the IRA contribution limit, most products allow future contributions to fluctuate depending on the client’s goals. For many clients in their 30s or 40s, this is important because it makes DIAs affordable as they continue to bear the expenses of raising children, paying down mortgages and, in many cases, paying off student loans.
Periodic payment options that allow younger clients to build the value of their annuity products over time can prove to be a critical selling point with younger clients, many of whom simply have not been saving long enough to establish the savings necessary to purchase a product with a high initial premium. Further, some carriers have made these recurring payments even more convenient by allowing clients to schedule automatic transfers into the product from their bank accounts.
Rates and Features
DIAs that allow periodic payments will generally guarantee the interest rate on each deposit for a period of time—perhaps one year—in determining how earnings are credited to the principal balance. While some carriers offer the initial rate on the specific deposit for the duration of the product’s life, many other carriers note that after the initial guarantee period, renewal interest rates will be determined based on current interest rates, though a guaranteed minimum rate will generally be specified in the contract.
Clients should be aware that many of these products have a surrender charge period that can last upwards of 10 years—though the surrender fee will decrease during each year of the surrender charge period.
Some carriers also provide options that can allow the client to withdraw from the contract without incurring surrender charges upon the occurrence of certain specified events, such as early retirement, entering a nursing home or being diagnosed with a terminal illness.
Clients should also pay attention to any fees that will be assessed on the contract—some carriers, for example, impose a fee upon contracts where the balance does not exceed a set level after a period of years—for example, a fee may be imposed upon a contract where the balance does not exceed $5,000 for a period of five years. On the other hand, some carriers impose a limit upon the total principal that can be contributed to the account each year.
While regulators have created new options for DIAs in the general annuity marketplace this past year, insurance carriers have picked up where they left off to provide flexibility to a new class of younger annuity purchasers—reading the fine print on the contract will ensure that these clients purchase the product that is right for them.
Originally published on National Underwriter Advanced Markets. National Underwriter Advanced Markets is the premier resource for financial planners, wealth managers, and advanced markets professionals who provide clients with expert financial and retirement planning advice.
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