To the list of oxymorons that includes “jumbo shrimp” and “deafening silence,” advisors can add another: “deferred immediate annuity.”
Immediate annuities increasingly are known as income annuities, which conveys the benefit to investors. Deferred income annuities (DIAs), in which a client buys now and pockets a set amount of cash flow in the future, are gaining ground. According to LIMRA, DIA sales reached $555 million in the third quarter, an increase of 106% from last year’s period; in the first nine months of 2013, DIA sales grew 132%, to $1.5 billion, and are on pace to surpass $2 billion by the end of the year, which would double 2012 results.
According to LIMRA, DIA sales reached $555 million in the third quarter, an increase of 106% from last year’s period; in the first nine months of 2013, DIA sales grew 132%, to $1.5 billion, and are on pace to surpass $2 billion by the end of the year, which would double 2012 results.
“I am a bit hesitant about locking in an annuity now because of interest rates being so low,” says Melissa Hammel, who heads a financial advisory firm in Brentwood, Tenn., “but I have recommended deferred income annuities for selected clients. I just started one for myself.”
By deferring the start of cash flow, today’s paltry yields look more enticing. For example, New York Life reports that the average buyer of its DIAs makes a purchase at age 58 and begins to receive payments at age 67. Clients can buy DIAs with one sizable premium or with a series of scheduled premiums.
Recently, New York Life was quoting lifetime payments north of $11,000 a year from a $100,000 investment on that age-58-to-age-67 deferral schedule; that was for a life-with-cash-refund annuity, in which beneficiaries will receive any shortfall from that $100,000 outlay in the case of the annuitant’s premature death. A start-at-once immediate annuity probably would have a much lower payout rate.
“I have suggested a deferred income annuity to some clients because I believe that the lifetime annuity payments will help ‘save’ them from themselves financially,” says Hammel. “For some clients, there is a tendency to spend what money is available. To protect them, I have advised buying an annuity. The payments will be in place to provide income but the clients will be prevented from getting at the principal. We generally like these for clients who tend toward overspending and probably could not manage a lump-sum distribution.”
As is the case with most annuities, it’s possible to buy a joint DIA for a married couple, so payments will continue as long as either spouse is alive. “There is a risk here,” says Hammel. “If both spouses die, there might be no money from this investment to pass on to their heirs. Therefore, we suggest that not all their money be invested in the annuity - just part of it.” Hammel says she prefers to use annuities from companies with low costs or those known for financial stability.