Feeling confident in your 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), a special kind of annuity which the annuitant cannot outlive. Deferring income, similar to waiting until 70 to withdraw Social Security, is one of the attractions of a DIA.
The longer you wait to receive payments, the higher the monthly reward. It’s the crux of delaying gratification.
But what happens if you wait too long? What happens if you die before you manage to annuitize the payments? In many cases, the premium is distributed to the beneficiary of those choosing the DIA with a return-of-premium option.
Now, though, there’s a new twist to the demand side of DIAs, or longevity annuities.
It turns out that many DIA annuity 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 annuitants can recoup their principal 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,” says 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 annuity buyers are forgoing the return-of-premium option in exchange for higher annuity payments — nearly double the payments — once they reach 80.
“For those who are well prepared, they've planned and been diligent and saving for that, 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 cover ages 65 to 80, or 85.
Annuity contract holders instead are saying “I need more benefit at age 85,” Ferris said.
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 only began marketing DIAs in 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), that always select a no-refund option,” said Stern, who is based in Englishtown, N.J. “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, the insurance trade research group, is in the midst of collecting detailed buying habits on single premium immediate annuities and deferred income annuities, and 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.
While many financial advisors remain skeptical about annuities, some see an important opening for registered investment advisors (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 the client against living significantly beyond the client’s life expectancy.”