DIAs Mix It Up with SPIAs in Income Annuity Market
About 5 percent of income annuities, listed on the database of CANNEX, are deferred income annuities (DIAs)—the new kids on the income annuity block. But they are get-ting known around the neighborhood. These products, which the industry increasingly refers to as DIAs, allow buyers to defer income for several years after purchase, says Gary Baker, president of CANNEX USA.
“DIAs are starting to trend now, and judging by the carriers who are calling and asking questions about the products, we expect to see at least five more carriers start offering DIAs in 2012,” says Baker, whose Springfield, Mass., firm is the U.S. division of CANNEX Financial Exchanges, Toronto. The firm gathers and compiles interest rates and calculation values on income annuities.
More than 60 U.S. insurance companies offer some form of income annuity, Baker estimates. “Twenty of them are on the CANNEX Exchange, and they represent about 70 percent of the U.S. income annuity market as measured by sales.”
Fully 95 percent of CANNEX-listed products are traditional single premium income annuities (SPIAs). Buyers deposit lump sums into these policies and begin taking monthly pay-outs (income) from them right away or within the first 12 or 13 months of purchase. SPIAs have been available for decades but only in the past year or so have they begun to attract enough sales to cause annuity watchers to pay them much heed.
The DIA Products
The DIA products are the ones that carriers are starting to look at now, Baker says. “Most of the quotes we see on these are for DIAs that defer income for seven to 10 years.” The target market is a client in the mid-50s to mid-60s.
Carriers that are interested in the contracts see them as income products that advisors and clients can use for “time segmentation or bucketing,” he says. That refers to setting up buck-ets of money that make payouts over varying durations, such as years one to five, six to 10 and 11 to 20 of the client’s income plan.
The fact that DIAs generate higher payouts than SPIAs—because their pay-outs don’t start for several years after purchase—also has appeal, he says. Example: A 65-year-old man who deposits $100,000 into a DIA that defers lifetime income for 10 years and that includes a 10-year period certain guarantee for the beneficiary would pay out, on average, $1,040 a month after policy year 10. By comparison, if the same man takes out a lifetime SPIA with the same amount of money and a 10-year-cer-tain option, he would receive, on aver-age, $553 a month starting right after policy issue. (The numbers show aver-age monthly income for the top five carriers in the CANNEX database.)
DIAs are very similar to so-called longevity annuities, Baker adds, except that the longevity purchase typically defers income for 20 or more years. As product development continues in this area, the industry is starting to use the term DIA for the seven-to 10-year products and longevity insurance or longevity annuities for the 20-year-and-up products, Baker notes.
Most DIAs are written so that once income payments start, they continue for the remainder of the annuitant’s lifetime. But DIAs do vary in design, depending on the carrier, Baker adds. For example, some allow the income to start after the first policy year, while the rare few allow it to start after the first two policy years.
Income Annuity Features
In general, income features in both SPIAs and DIAs fall into two broad categories, says Baker. These categories are guarantees and liquidity features. Carriers vary in which features they offer.
In the guarantee category, roughly 60 percent of products in the CANNEX Exchange database offer a guarantee period/period certain option, so that if death occurs within the stated period, the beneficiary will receive the income stream for the rest of the guarantee period. Twenty percent of the products offer a cash or installment refund.
Just 20 percent are life-only contracts that offer no guarantee period at all. A lot of quotes go out with the 10-year period certain option included, Baker notes. “That option is popular because it removes the behavioral barrier to purchase—that is, the concern that if the person buys a product without that option and then dies soon after, the estate will get none of the money.”
The fact that the 10-year period certain option costs very little extra is a factor, too, he says. For example, a $100,000 SPIA purchased by a 65-year-old man above would pay roughly $574 a month if he buys a $100,000 life-only SPIA, but only $23 less ($553 a month) if the SPIA is a life with 10-year period certain products.
As for the liquidity features, these can be triggered after purchase, while the annuitant is still alive, says Baker. These features include return-of-premium, cash withdrawal (full, partial, or accelerated), and commutation. The partial cash withdrawal feature started showing up in income contracts about three or four years ago, Baker recalls. They typically allow the owner to take out 12 months of payments in a single check one time during the life of the contract, though a few may allow more than one time. The average age of the SPIA buyer in the CANNEX database is 70, and the average single premium this year is $225,000. “The distribution firms are telling me that clients are putting from 20 to 40 percent of their life savings at age 70 into these products,” Baker says. “They are using the income payments to help cover basic living expenses, and keeping the rest of their portfolios invested and their legacy plans in place.”
Issues with Income Annuities
Income annuities do pose issues, how-ever. For example, Gary S. Mettler, vice president and director of advanced sales at Presidential Life Insurance Co., cautions that when it comes to dealing with marital property claims, illiquidity is both the bane and the benefit of SPIA contracts.
“Not only are traditional SPIAs and newer DIAs illiquid as to cash surrender values or commuted values,” he writes in, “Oh No! DIAs & SPIAs in Marital Property Estates,” a white paper released in December, “but the annuitants and contract features such as COLAs (cost of living adjustments) and rights of survivorship, period certain durations, payment amounts and dates can’t be altered after the contract issue date.”
How does all this shake out and how is marital interest determined for these contracts? The 12-page white paper addresses several aspects of the problem. For instance, Mettler writes that “the timing of contributions, in this case paid premium, determines marital interest [existing case law varies by state]. If contributions are made during the marital period, they are marital property and earnings thereon are marital property. If contributions are made prior to the date of marriage or after the date the marital interest ends [this date varies by state] then, these are separate property and the interest thereon is separate property.”
Baker mentions a few issues, too. One is how specific tax issues involving the IRS Code will be resolved. “These are currently being addressed in Washing-ton,” he says. Another issue is how to resolve questions over how to keep the income annuity assets on brokerage, bank and advisor statements of assets under management (AUM). “We need a standard methodology that shows the values of any asset that has been annuitized.”
Of course, every emerging product has issues to be worked out and peculiarities to be understood. The CANNEX sales growth projection shows that producers and distributors are willing to learn more about DIAs. Our guess is, because DIAs help fill in the gaps in retirement planning, these products will be an even more popular resident in the income annuity neighborhood.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning.