If one of the main reasons to buy annuities is to receive guaranteed income in retirement, then which type of annuities provides the greatest guaranteed income?
CANNEX researchers put a number of different annuities to the test in an attempt to solve that puzzle. The answer is - it depends.
A new CANNEX report compared different types of annuities with equivalent benefits. Researchers found that the highest guaranteed income product varies significantly depending on the client – whether a man or a woman, a single person or a couple – as well as when income begins.
The report looked at FIAs, DIAs, SPIAs and variable annuities in determining which product generated the highest guaranteed income.
Single-premium immediate annuities were generally found to provide the highest income guarantee for those planning on drawing immediate income. But, for a couple who are of different ages, the study found that a variable annuity with guaranteed income may generate the highest annual payments.
Gender A Big Factor
A fixed indexed annuity provides a greater guaranteed stream of income than a deferred income annuity or a variable annuity for an individual who wants to begin drawing down money in five or 10 years.
The difference among annuities also shows up when looking at whether the owner is a man or a woman.
For women, the difference in income between an FIA and a DIA is even greater. DIA benefit payments for women are lower than they are for men, based on longevity expectations. The longer the delay in taking income, the greater the benefit for women who choose an FIA over a DIA.
For example, based on a $100,000 premium investment in a DIA at 65 years old, a woman of average projected longevity would receive, after 10 years deferral, around $11,700 in annual income, versus approximately $12,900 for a man. By contrast, an FIA could generate as much as $14,313 of annual income for a woman or a man.
“We were surprised that all three products – SPIAs, FIAs and VAs - had places where they excelled,” Tamiko Toland, CANNEX head of annuity research, told InsuranceNewsNet.
“Although we have these rules of thumb, they’re not always good rules of thumb,” she continued. “For example, we say usually if you’re taking income immediately, the SPIA is best. But there are examples where a VA is actually better, even if you’re taking the income on day one, which is actually surprising.”
'Not Common Delays'
Another surprising finding, Toland said, was that DIAs don’t always generate a large amount of income if there is a delay in taking income.
“At age 70 for men, you see a DIA actually does really well after a five-year or a 10-year delay, but those are not common delays," she said. "Usually, folks who are taking income at age 70 are taking it immediately. So that may be one reason for that."
The key takeaway from the study, Toland said, is, “if you have a client who has an income objective, then it’s really important to look across product types and figure out what’s going to be best for that client. If you want to look at purely the income guarantee, we see just on that basis alone there are circumstances where any three of these product types might be best.
“There are many factors that go into the selection of an annuity. Income generation is not the only one, but it is central to their value proposition and advisors need to rely on real analytics, not traditional perceptions or best guesses of how guarantees work to best serve their clients.”
Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.