By Steve Brenneman
Interest in deferred income annuities (DIAs) has been burgeoning. As LIMRA president and chief executive officer Bob Kerzner noted in the organization’s Third Quarter 2013 Industry Briefing, sales of DIAs were up 155 percent in the second quarter of 2013 compared to the second quarter of 2012. What’s more, LIMRA reported that DIA sales are on track to hit $2 billion by the end of this year — double the total for 2012.
As new DIA carriers enter the market and existing carriers refine their DIA offerings, now may be one of the most opportune times ever to consider reviewing DIAs as a modest part of an overall balanced retirement strategy for certain clients.
It’s easy to see why. These products may be particularly appropriate for clients who are approaching retirement within the next five to 10 years and who have a need to secure more guaranteed retirement income for less money. After all, many Americans no longer have a rosy pension plan from their employer to help carry them through their retirement years. Many such plans have unfortunately gone by the wayside.
Furthermore, many Americans have experienced significant losses to their retirement portfolios over the past several years. The nest egg on which they were counting can’t necessarily cover all the needs and wants it might have covered in the past. Many clients have a need for guaranteed income for life — and with a DIA, you can help them achieve it.
Think of the new client who, at five years prior to his desired retirement age, realizes that he has very little time to try to secure sufficient income for his nonworking years. He can put dollars into (for example) a mutual fund, but there is no guarantee as to what return that investment will achieve. The client could face a formidable challenge to grow his investment quickly enough to secure the level of payment that is guaranteed by a DIA.
Similarly, if a client at age 60 were to set aside money in an account that bears 5 percent interest annually, and then retire at age 65 and live off of systematic withdrawals from that account, the probability is very low that he could enjoy the same level of retirement income that is assured with a DIA. Remember, a DIA permanently converts principal into a guaranteed income stream in the future.
Recent surveys have shown that more people would favor the peace of mind provided by a guaranteed income for life versus taking on higher risk for the potential of higher returns. With a DIA, clients can harness more financial security for themselves by putting their assets back to work. Since some Americans may have been reluctant in recent years to re-enter the market, they are now converting traditional, low-yield assets to DIAs as well as to single premium income annuities (SPIAs) because of the efficiency of these annuity products to produce substantially more guaranteed income for life than with many other retirement income methods.
In fact, DIAs can be so attractive, especially at current rates, that they merit consideration as a planning tool to supplement any type of retirement income. They are customizable, too. The exact amount of the payout is determined by the choices that the client makes, including the premium purchase amount, payout option and income start date. The future income is guaranteed and is not subject to market fluctuations.
Also, with many DIA products available today, if the client’s circumstances change, he can generally accelerate or defer the start date of the income payout for up to five years, one time during the annuity contract. For example, the client may decide to delay retirement from age 65 to 68, in which case he can change the start date of the payout to coincide with his new retirement date.
Among the benefits of locking in a DIA today can be that rates are based on current mortality tables. If life expectancy tables change in the future, reflecting increases in longevity, annuity premiums may rise. At any rate, of course, annuities are insurance against the prospect of a long life — and we all know Americans are living long lives. In fact, for a married couple age 65, there’s a 50 percent chance of at least one spouse living to 94 years old and a 10 percent chance that one will live to age 104. Many people have no idea how to make their retirement income last that long. A DIA may provide an element of certainty in an uncertain world.
To help gain a share of the DIA market, look for clients in your book of business who haven’t reached retirement age yet but who have a goal of retiring fairly soon; then, identify their anticipated retirement income and help them determine any gaps that may exist. A quote can show your client how a DIA can help bridge the anticipated income gap.
You’ll want to review the full scope of annuity products that can help meet the unique needs of your clients. DIAs clearly can be an appropriate choice for certain clients who have time to plan for their retirement and who want to schedule future guaranteed income. SPIAs, on the other hand, are often purchased post-retirement, as “rescue vehicles” for new clients who have come to realize how difficult it can be for them to manage their own assets to produce sufficient retirement income.
Other clients with different needs may prefer to utilize an annuity laddering strategy as discussed by my colleague, Bill Martina, in earlier articles, or use indexed or variable annuities to complement the other financial products in their retirement plans.
Whichever approach with annuities is most fitting, be sure to check for the latest offerings from carriers and to carefully consider the features and benefits of each product, including innovations in guaranteed living benefit (GLB) riders. Your customer will still need to consult a qualified tax advisor, but you’ll have set the stage for creating not only a paycheck for life, but also a client for life.
Steve Brenneman is vice president, American General Life Companies.