New DIA Market: Generation X

By Linda Koco InsuranceNewsNet

Will deferred income annuities appeal to Generation X? Some annuity watchers have been thinking “no,” but new data from the leading seller in this market suggests the answer is “yes.”

Those in the “not” camp believe Gen Xers won’t buy deferred income annuities (DIAs) because most of these products are income annuities that delay payout for many years, making it too far in the future for these mid-life adults. In addition, they say that Gen Xers, who are now ages to 35-48, have too many other spend-now priorities — such as mortgages and college tuition — competing for their dollars and attention.

But this week, New York Life published some statistics about its own DIA sales that challenge those assumptions.

The carrier had dropped the minimum premium for its DIA, the Guaranteed Future Income Annuity, to $5,000 from the previous $10,000, last spring. Since then, the company said in a statement, the average age of customers buying the DIA with an initial premium of $5,000 became 48 years. That’s 10 years younger than the company’s overall average DIA customer, the company said.

It’s also 10 or more years younger than the average age of DIA buyers industrywide. The industry average for DIA buyers is the late 50s, with most ranging from the early-50s to the mid-60s, according to figures reported in August by the Insured Retirement Institute (IRI).

Significantly, age 48 happens to be the current age of the oldest Gen Xers, who were born between 1965 and 1978. Those are the folks who are supposed to be not-so-interested in DIAs.

The Key

The key that seems to have turned the lock on Gen X buyer purchasing is the price point of the minimum premium. Or at least the lower entry price seems to be a highly relevant factor. (No doubt, marketing, education and training, and selling partnerships helped, too.)

When the carrier announced it was dropping the minimum to $5,000 last April, Matt Grove, senior managing director, indicated that the company believed the new lower minimum would spur Gen Xers and Gen Yers who may already be making regular individual retirement account contributions to consider the DIA as their funding vehicle.

Younger workers are the least likely groups to have a defined benefit plan, the carrier pointed out, so the combination of tax benefits of an IRA and the pension-like guaranteed lifetime income of the DIA might be attractive to these adults.

Carriers often decide to lower the minimum premium on certain annuities. They may do this to increase market penetration or to meet market demand, for instance. Competitors do eyeball those changes, but they quickly yawn.

In this case, however, the company doing the minimum premium reduction is the nation’s leading deferred income annuity (DIA) seller. (Earlier this year, its DIA premiums had exceeded $1 billion since the product’s introduction in July 2011, according to the company. Early this week, it said that its DIA market share in LIMRA’s second quarter report was 44 percent.) In a developing annuity line like this one, the biggest seller makes waves, not yawns.

It’s qualified money

The qualified money aspect is significant. The carrier said that theDIAs it has sold with a $5,000 initial premium have gone primarily into newly-opened IRAs.

That fits with the finances of many Gen X workers who may view the lower going-in premium as easier on the budget compared to the DIA’s previous $10,000 minimum. In addition, Gen Xers might like the fact that the figure happens to fall just shy of the 2013 IRA contribution cap for workers under age 50 ($5,500 for 2013, according to the Internal Revenue Service). Mentally, it’s a close fit.

The fact that these are “newly-opened” DIA/IRAs suggests that some of the buyers are probably self-employed Gen-Xers and younger baby boomers who 1) want a tax-qualified retirement savings plan even though they are not working at a firm that provides a retirement plan; 2) want their plan to resemble the defined benefit plans their parents had, and 3) want a plan they can afford even while meeting other mid-life expenses.

If they didn’t want all three things, they might not have bought the contract.

By comparison, the primary funding method for all other Guaranteed Future Income Annuities sold by New York Life are IRA rollovers with an average initial premium of $100,000. The rollovers are from another qualified plan, according to the carrier.

The amount is in keeping with the profile of many older workers, many of whom do rollovers — of substantial sums — when they retire.

In a study published this summer, for instance, the Employee Benefit Research Institute (EBRI) noted that the average rollover amounts increase with age. For those ages 60-64, the average amount was slightly over $121,000 in 2011, EBRI said. The average amount keeps rising until age 70, at which point average rollover amounts begin to decrease.

Heads-up for advisors and carriers: Twenty percent of the DIAs sold with the $5,000 minimum initial premium have been “pre-set” for a recurring annual contribution, New York Life said.

That suggests these buyers want not only to get in the DIA/IRA door with a low-ball entry amount but they also intend to build their retirement income value over time. Advisors who prefer to do relationship-based sales might like that, since these Gen Xers will inevitably contact the agent as they continue funding their policies.

By contrast, only 3 percent of all other Guaranteed Future Income Annuity policies — the ones sold with the average initial premium of $100,000 — have pre-set recurring contributions. So, unless the advisor sees the client for other reasons, the advisor-client contact may be limited until it’s time to start income.

Examples

Here is a company-provided example of how two Gen Xers might use the Guaranteed Future Income Annuity with a $5,000 initial premium for retirement income purposes. This is for a DIA written with a “life with cash refund” option:

· A 48-year-old man buys the New York Life DIA with a $5,000 IRA contribution and then contributes $5,000 to it annually. When he retires at age 66, he will receive $9,622 a year for the rest of his life.

· A 37-year-old man buys the DIA with a $5,000 IRA contribution and contributes $5,000 annually. When he retires at age 66, he will receive $20,667 a year for the rest of his life.

By comparison, New York Life’s average DIA customer is age 58 and defers taking income for nine years. If making a $100,000 contribution to a plan with the “life with cash refund” option, the man would receive $11,427 a year for the rest of his life starting at age 67, the carrier said.

According to IRI, at least 12 companies now offer or have filed to offer a DIA product. That is up from only six carriers last year.

Early last year, the Treasury Department proposed regulationsthat would make it easier for workers to use part of their retirement accounts, such as 401(k)s and IRAs, to buy longevity annuities (another name for DIAs). Should the regulations ultimately be adopted, they likely will spur increased DIA sales.

Sales already are popping. LIMRA said the products topped$1 billion at year-end 2012 and are likely to hit $2 billion by year-end 2013. The contracts have been actively selling for only a few years.

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].