DIAs Mix It Up with SPIAs in Income Annuity Market

December 07, 2011

By Linda Koco
Contributing Editor, AnnuityNews

About 5 percent of income annuities listed on the database of CANNEX are deferred income annuities, the new kids on the income annuity block.

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. He spoke with InsuranceNewsNet about the trends he is seeing in these products as 2011 comes to a close.

“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 payouts (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 buckets 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 payouts 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-certain option, he would receive, on average, $553 a month starting right after policy issue. (The numbers show average 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, however. For example, Gary S. Mettler, vice president and director of advanced sales at Presidential Life Insurance Company, Nyack, N.Y., 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 just released this week, “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? he asks. 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 certain tax issues involving the IRS Code will be resolved. “These are currently being addressed in Washington,” 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.”

 Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.

© Entire contents copyright 2011 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.


Comments

Jordan McGrath

12/8/2011 10:52:50 PM - Scottsdale

David Playing devils advocate, how could a client justify losing control of an asset when they can get a "similar" income with an FIA? Jordan McGrath

Jordan McGrath

12/8/2011 10:40:10 PM - Scottsdale

I ran some numbers as well and with a 7% roll up for 10 years and a 6% payout the FIA payout is larger than the DIA example they used in the article above. Most of the major players (Midland, North American, Aviva, Annexus, American Equity) in the FIA marketplace are all at 6% payout at 75. Even using your figures is $100/month or $1,200/year worth it to a client to completly lose control of the asset and have no other options if goals and objective change in the future? Jordan McGrath

Jordan McGrath

12/8/2011 3:44:30 PM - Scottsdale

I ran some numbers as well and with a 7% roll up for 10 years and a 6% payout the FIA payout is larger than the DIA example they used in the article above. Most of the major players (Midland, North American, Aviva, Annexus, American Equity) in the FIA marketplace are all at 6% payout at 75. Even using your figures is $100/month or $1,200/year worth it to a client to completly lose control of the asset and have no other options if goals and objective change in the future? Jordan McGrath

David Chi

12/8/2011 3:42:21 PM - Philadelphia, PA

continued; However, FIA payout percentages are filed and cannot react as quickly. Therefore, in an increasing rate environment it will be hard for the FIA to keep up with the DIA. Also, some insurance companies have recently filed to reduce the income percentages on their FIA income rider products. In summary, both products are good at producing guaranteed income and both should be considered when talking with a client.

David Chi

12/8/2011 3:37:55 PM - Philadelphia, PA

The DIA has the potential to generate a much higher income stream. One factor is the income commencement age. A FIA income percent usually covers a range of ages such as 5% for age 65 to 70. A DIA would have a higher payment if income begins at age 70 vs. age 65. Therefore, in this example, the DIA should have a much better payout over the FIA if payments commence at age 70. The second factor is rates. DIA payout rates can change quicker depending on the rate environment (up or down). However,

David Chi

12/8/2011 3:36:50 PM - Philadelphia, PA

The DIA has the potential to generate a much higher income stream. One factor is the income commencement age. A FIA income percent usually covers a range of ages such as 5% for age 65 to 70. A DIA would have a higher payment if income begins at age 70 vs. age 65. Therefore, in this example, the DIA should have a much better payout over the FIA if payments commence at age 70. The second factor is rates. DIA payout rates can change quicker depending on the rate environment (up or down). However,

Jordan McGrath

12/8/2011 11:27:28 AM - Scottsdale

I ran some numbers as well and with a 7% roll up for 10 years and a 6% payout the FIA payout is larger than the DIA example they used in the article above. Most of the major players (Midland, North American, Aviva, Annexus, American Equity) in the FIA marketplace are all at 6% payout at 75. Even using your figures is $100/month or $1,200/year worth it to a client to completly lose control of the asset and have no other options if goals and objective change in the future? Jordan McGrath

Leah Brandt

12/8/2011 10:23:50 AM - New Hope, MN

@Jordan McGrath - It is very difficult to generate more income from an FIA w/an income rider. Income riders' payouts are not as high as an immediate or DIA, even if the income account value is greater. I ran some numbers. In the example above, one company came close (7% cmpd rollup, 5.75% payout @ 75). Most were $100 or more lower per month. If the client wants a higher payout, they have to give up some control.

Jordan McGrath

12/8/2011 10:08:06 AM - Scottsdale, AZ

If you can generate more income with a FIA with income rider and keep control of the asset what would be the reasoning behind writing a DIA? Jordan McGrath

Jordan McGrath

12/8/2011 8:59:01 AM - Scottsdale, AZ

If you can generate more income with a FIA with income rider and keep control of the asset what would be the reasoning behind writing a DIA? Jordan McGrath

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