With Fewer Pensions, Deferred Income Annuities Gain Ground
In 2012, deferred income annuities (DIAs) were offered by only five or six insurance companies, according to Jafor Iqbal, assistant vice president at LIMRA Secure Retirement Institute. Total sales were just over $1 billion, he says. By the end of 2014, 15 companies were selling individual DIAs, and sales reached $2.7 billion, Iqbal says.
One reason for DIAs current popularity is the growing scarcity of traditional pensions, which have long provided retirees with a steady income stream. Our data show that over half the households with retirees 75 or older have pensions, says Iqbal, while many fewer households in the 46-54 age range expect to receive pensions.
Ross Goldstein, managing director at New York Life, says that DIAs are gaining ground because they mirror the pensions that previous generations enjoyed. You pay the insurer a premium and pick a future income start date, he says. Youll know how much you will receive for the rest of your life.
DIAs do have their drawbacks. Payouts generally are not adjusted for inflation, and buyers are reliant upon an insurers fiscal strength to ensure payment.
WHEN IT PAYS TO WAIT
Iqbal reports that DIA purchasers typically are between the ages of 58 to 63, and tend to wait four to nine years to begin their payments. The longer the waiting period, the greater the promised periodic cash flow. For example, says Goldstein, assuming a $100,000 premium and a life-only (not cash refund) DIA, the annual payout to a 60-year-old buyer might be 8.07% with a 5-year deferral and 12.28% with a 10-year deferral.
About 90% of his companys DIAs are purchased with a premium refund option, Goldstein notes. That is, beneficiaries will get a payment if the purchaser of the annuity dies before receiving the amount invested. Currently, he adds, a male, age 58, deferring for nine years with a one-time premium payment of $100,000 and electing a cash refund payout option can secure a lifelong income stream of $736 per month: over $8,832 (8.8%) a year.
Other, relatively recent, innovations: Purchasers may be able to pay flexible premiums, rather than a single initial lump sum, says Iqbal. There is also more flexibility as to when payments will start, and possibly some provision for accelerating payments, he says.
The guaranteed payouts cannot be replicated on ones own or with any other product, Goldstein says. If income is your goal, the DIA is the most efficient way to generate income in retirement.
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.
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