The next big rollover vehicle? Longevity insurance

With sales of deferred-income annuities up, carriers see an opportunity
MAY 07, 2013
Deferred-income annuities may be fairly new additions to the retirement products menu, but insurance executives already see them as potential mainstays in rollover accounts. At New York Life Insurance Co., which launched a DIA in 2011, sales of the product have already topped $1 billion. Seventy percent of the sales are funded by qualified dollars and buyers typically are their mid- to late 50s and have been deferring income for about nine years, according to Ross Goldstein, corporate vice president at New York Life. The data, he noted, suggests that assets are being rolled over from IRAs and retirement plans. Data from LIMRA reveals that deferred-income annuities, which are also known as longevity insurance, reached $1 billion in sales last year. The research group only started reporting that data in 2012 as the providers grew in number, growing to eight sellers, from four the previous year. DIAs allow clients to buy an income stream that will begin at some point in the future. The catch? The contract holder must live long enough to receive the payments. Indeed, unlike with traditional life insurance, carriers are betting customers will not exceed their predicted lifespan. It's a good bet. Data shows that, in a pool of buyers, only a certain number will live long enough to receive the deferred income. Not surprisingly, more carriers are jumping to the market. ING USA Annuity and Life Insurance Co. recently announced the launch of its Lifetime Income DIA. That product rewards clients for delaying income, boosting their base by 150% for a five-year deferral and by 225% for a 10-year wait. “We feel there will be quite a few rollovers coming into the product,” said Chad Tope, president at ING Annuity and Asset Sales. “We hope with all the cash sitting on the sidelines that we can work with advisers to help them capture some of that.” First, advisers have to familiarize themselves with how longevity insurance works. Buyers get the biggest bang for their buck if they hold off on taking income until they are in their 80s, when there are likely to be fewer members of the original cohort still living, noted Judson Forner, senior analyst in investment services at ValMark Securities Inc. That can be an obstacle, considering clients who roll over into longevity insurance need to take their required IRA minimum distributions by age 70½. A possible legislative fix to that would be to allow DIA buyers to bypass the distribution requirement at that age, with the knowledge that they will tap their annuity income in their 80s, Mr. Forner said. “Right now it's a nonqualified play, but down the road, depending on legislation, we could see more 401(k) dollars going there,” he added. “I don't think we'll see a lot of rollover money go there just yet, but it will later.” In the meantime, advisers are getting familiar with strategies that employ DIAs. The concept of waiting five to ten years for income — rather than 15 — is more palatable for clients, so Mr. Forner's firm has been working on plans that involve shorter-duration annuities. A five-year product with a cost-of-living adjustment feature, for instance, can supplement income in retirement and allow clients to hold off on taking income from an existing variable annuity. The VA thus has more time to accumulate. Also, for clients who are living on business buyout payments in retirement, DIAs can help sustain income when those payment streams end, Mr. Forner noted. “When you open the discussion to using the DIA and looking at the longer deferrals to explain the concept, most people are nervous that they won't live that long,” he said. “Clients look at these 5- to 10-year periods after they understand how the contracts work.”

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