InsuranceNewsNet Magazine February 2012 : 10
DIAs Mix It Up with SPIAs in Income Annuity Market in Front Timely issues that matter to you. BY Linda Koco A bout 5 percent of income annu-ities, 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, presi-dent of CANNEX USA. “DIAs are starting to trend now, and judging by the carriers who are calling and asking questions about the prod-ucts, 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 compa-nies 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 pre-mium income annuities (SPIAs). Buy-ers deposit lump sums into these pol-icies 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 car-riers 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 10 InsuranceNewsNet Magazine February 2012 in the mid-50s to mid-60s. Carriers that are interested in the contracts see them as income prod-ucts 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 guar-antee 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 car-riers in the CANNEX database.) DIAs are very similar to so-called lon-gevity 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 cat-egories, says Baker. These categories are guarantees and liquidity features. Car-riers 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 cer-tain 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 accel-erated), 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
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