By Cyril Tuohy
Deferred income annuities (DIA), just a blip on the annuity landscape a year ago, are starting to move beyond their infancy with the help of more distribution channels through which they can be sold, experts said.
The first DIAs were offered by mutual insurance companies with captive agent sales forces but with a half dozen more companies filing to offer DIA products this year, distribution of DIAs will “reflect the models employed by those companies,” said Cathy Weatherford, president and chief executive officer of the Insured Retirement Institute (IRI), a life and annuities trade group.
Weatherford said as many as a dozen companies either offer or have filed documents seeking to offer DIAs. A separate LIMRA-CANNEX study published earlier this year estimates that as many as 17 companies offer DIAs in the U.S. and Canada.
“Most DIAs are purchased by buyers ranging from their early 50s to mid-60s,” Weatherford wrote in an e-mail to InsuranceNewsNet. “That being said, the introduction to the annuities market of DIAs should be seen as an expansion of the annuity product shelf. DIA buyers have different needs.”
Though total sales are still low, on a percentage basis, DIAs will be the fastest growing annuity product in 2013 and 2014, IRI predicted. DIA sales, which surpassed the $1 billion dollar mark last year, are on pace to hit $2 billion this year, according to LIMRA.
By comparison, variable annuities alone last year topped $143 billion in sales, according to Morningstar, but if DIAs are to grow and make their mark, they will need to broaden their appeal as well as their distribution channels.
For financial advisors, the increasing popularity of DIAs means another guaranteed-income option they can offer to the 77 million baby boomers in the U.S. who are looking for stable income in the post-retirement period of their lives.
DIAs have been around since the mid-1990s. New DIA sales channels include registered independent marketing organizations, registered investment advisors (RIAs) and independent financial advisors.
“As more companies begin to offer DIA products and as they expand into new distribution channels, DIAs are becoming a viable option for consumers and financial advisors looking for guaranteed retirement income to insure against longevity risk," Weatherford said.
Specifically designed to insure against longevity risk, DIAs come in two varieties: fixed and variable. Both delay income payouts, starting anywhere from two to 40 years after issue. DIAs offer less flexibility and DIA investors typically cede control of the assets to the insurance company. In exchange, DIAs offer the highest guaranteed income amounts, according to IRI.
Experts like Weatherford and LIMRA researchers caution that DIAs are geared for use with other annuities or income-generating financial vehicles as part of a complete retirement program, or a laddered annuity retirement strategy.
Now that DIAs have established a foothold in the marketplace, underwriters will look for ways to make the product more appealing to younger investors, said Scott Hawkins, vice president of insurance research and consulting with Conning.
Insurers, he said, are seeing new DIA opportunities with Gen X and “Gen Y or younger” workers with no defined benefit plans, and accumulating savings only through 401(k) and individual retirement accounts (IRAs).
“Here a flexible premium DIA is interesting,” he said. Other insurers are tinkering with more flexibility to their DIAs offering guaranteed living withdrawal benefits allowing investors withdrawals without in fact annuitizing the contract to avoid having all the assets go to the insurer.
“Those are starting to come into those DIAs,” he said. “The concern in the past was giving up all control of the assets.”
DIA product features have been broadened to include the ability to make multiple contributions before the income start date, and to choose a wider range of income commencement dates – from 13 months to 45 years, according to the LIMRA-CANNEX study titled “Features in Income Annuities – Immediate and Deferred Income Annuity Designs.”
In addition, more liquidity features and cost-of-living adjustments have been added to DIAs, LIMRA added.
For advisors, the traditional windows of opportunity during which to sell DIAs are when a retiree turns 65 and discussions turn to converting 401(k) and IRA assets into retirement income vehicles, Hawkins said. Advisors also can talk about DIAs when a retiree turns 70 and a half, and has to start withdrawing retirement assets pursuant to Internal Revenue Service rules.
But with more flexibility, financial advisors now can talk about how investors don't have to put all of their money in a DIA. “It becomes another tool the financial advisor can use with the client as part of their overall income planning,” he said. “It adds to the advisor’s tool box.”
DIA underwriters include Northwestern Mutual Life, Mutual of Omaha, Fidelity Investments and New York Life. New York Life slashed its initial premium payment from $10,000 to $5,000 for its Guaranteed Future Income Annuity (GFIA), and Principal Financial Group launched its Principal Deferred Income Annuity.
This week, Lincoln Financial Group also announced the launch of its Lincoln Deferred Income Solutions, the company's first DIA.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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