Outliving one’s income has always been a risk that has worried those that are near, at, or well into retirement. The Insurance industry now has a new solution to that problem that may reduce some of that anxiety and provide an increase in retirement income when it is needed most. Some call it “future income insurance”.
However, it is, in fact, an annuity. Some carriers call it a “deferred income annuity” (DIA), others a “contingent deferred annuity” (CDA), or a Guaranteed Future Income Annuity (never mind). For purposes of this article, we’ll just call them DIAs.
It’s a bit controversial because you have to tie up the money now and there are different ways carriers treat the actual year you can start pulling money out of it. Regulatory agencies are taking a hard look at just how the insurance companies intend to reserve the product and what variations on this DIA theme the marketing people are starting to dream up to increase sales. Currently, the National Association of Insurance Commissioners (NAIC) is holding public hearings on the new annuity design and how its put together by actuaries.
Articles I’ve read about the contract make it sound more complicated than it is.
Think of it as an single-premium deferred annuity (SPDA) with a future annuitization date. The point in doing this is that the older you are when you start the income stream, the more income you can get because (duh) older people don’t live as long as younger people.
So say, for instance, a 65-year-old man buys a $100,000 single premium immediate annuity (SPIA) and gets a life-time annual income of $7,000 a year for life. If that same 65-year-old puts down $100,000 now and buys a DIA, his income stream at 85 might be around $60,000 a year.
The DIA is not without its downside, as you may have already figured out.
As with most SPIAs, your single premium – in our example, $100,000 – is essentially “gone”. You have just purchased an income that you can’t outlive for that one payment. The above figures look good unless (uh-oh) you die before the income stream is scheduled to start. If you die before payouts begin, the insurer keeps the single premium that you paid for your DIA. (Can you say “Attorney of adult children files lawsuit” quickly, three times?)
That, in itself, is enough to put a lot of people off . But, add to that the risk that the market heats up, inflation increases, Suze Orman starts indicating that anyone that bought a DIA was an idiot, yada, yada, and….yada, well, then you would not be very happy with your having tied up that much money in such a financial product, would you?
But, there are some policy features from some carriers that make such contingencies a little easier to live with:
- An inflation rider that allows the income stream to be adjusted between 1% and 6% a year when the income stream starts
- A feature that allows starting payments earlier for a steady source of income throughout retirement
- Using a “laddering” technique like those that buy bonds and certificates of deposit, spreading purchases over a number of years so that if interest rates rise, so will the payments received.
- Providing an “escape clause” or a beneficiary option to either continue the deferred period or the payout period in case of the death of the annuitant.
It might help if one could purchase DIA through their 401(k) and/or IRAs, but that option isn’t available yet.