Do your clients feel confident in their retirement longevity? If so, there’s a new annuity trend that some in the insurance industry are calling “an amazing deal.”
The trend involves the deferred income annuity (DIA). Deferring income, similar to waiting until age 70 to withdraw Social Security, is one of the attractions of a DIA.
The longer your clients wait to receive payments, the higher the monthly reward. It’s the crux of delaying gratification.
That was the original intention with the product. But over time, a return-of-premium option was added to counter client objections of dying before the income started. With the ROP option, the premium would be distributed to beneficiaries, at a cost, of course.
Now, though, there’s a return to the old-fashioned values of DIAs, also known as longevity annuities.
Higher Income Becoming a Trend
It turns out that many DIA contract holders want more income at the expense of the return-of-premium option.
It’s the latest development that some industry consultants say they have come across in the DIA space. As a result, some DIA holders can recoup their initial investment in as little as three years from the moment they received their first payment.
For those who do, the no-refund option is “an excellent deal,” said Andy Ferris, a Chicago-based director with Deloitte Consulting. “For the right person, this is an amazing deal.”
Just how good is the no-refund option? Let’s do the math.
Suppose a 65-year-old pre-retiree decides to put $100,000 into a DIA, or a similar type of longevity annuity, and elects to begin payouts 15 years hence, at age 80.
Under a traditional longevity annuity design, assuming the contract holder has elected the return-of-premium option, a $100,000 DIA might pay out $18,000 annually beginning at age 80. If the annuitant dies before age 80, the premium is returned to the beneficiary.
But more DIA buyers are forgoing the return-of-premium option in exchange for higher annuity payments — nearly double the payments — once they reach age 80.
“For those who are well-prepared, they've planned and been diligent and saving for that, and now their worry is ‘What if I live too long?’ For relatively cheap, they can get $30,000 a year for the rest of their lives beginning at age 80,” Ferris said.
“In that scenario, you are going to be made whole in just over three annual payments,” he added.
Beneficiaries don't need the cash refund because the annuitant has enough in retirement assets to last him between the ages of 65 and 80, or 85.
Annuity contract holders instead are saying, “I need more benefit at age 85,” Ferris said.
How Can Carriers Afford This?
Insurance carriers can afford to pay the more generous sums on the DIA because of all the other would-be annuitants who died before reaching age 80. Theirs are the “lives” to whom the carriers won’t be making any payments.
Instead, the carriers end up making higher payments to those who live past age 80.
Using insurance carrier software, agents can offer illustration scenarios with and without the return-of-premium option, said Hersh Stern, founder of the online annuity brokerage ImmediateAnnuities.com and publisher of the Annuity Shopper Buyer’s Guide.
Stern, who didn’t begin to market DIAs until late 2013 and 2014, said his research indicates that buyers of longevity annuities lean toward the no-refund option.
“I'd say there's a chunk, a substantial number (of buyers), who always select a no-refund option,” Stern said. “They are willing to cover beneficiary payments with other assets, or they have other longevity insurance.”
More data on longevity annuity buying habits is forthcoming.
LIMRA is in the midst of collecting detailed buying habits on single premium immediate annuities and deferred income annuities. The research organization plans to release the results later this year, a spokesman said.
DIAs are the weakest-selling of all fixed annuities. They registered only $1.1 billion in sales in the first half of last year, a drop of 16 percent from the year-ago period, according to the LIMRA Secure Retirement Institute.
By contrast, hot-selling indexed annuities topped $24 billion in the first half of last year, a drop of only 1 percent compared with the year-ago figures, LIMRA data show.
Good News for Agents and RIAs
The DIA trend is good news for insurance agents, but also is attracting the interest of registered investment advisors who usually are not so annuity-minded.
Although many financial advisors remain skeptical about annuities, some see an important opening for RIAs to sell the longevity annuities as part of a financial planning strategy and as a hedge against living too long.
With longevity annuities, “RIAs could manage the base retirement savings outside of insurance products if he or she wishes, producing income to the client’s life expectancy,” Ferris said. “A small portion of that savings would be used to purchase this product, for the purpose of protecting clients against living significantly beyond their life expectancy.”