Deferred Income Annuity

Lincoln Financial has just launched the Deferred Income Solutions annuity product.  Originally known as longevity insurance, a Deferred Income Annuity (DIA) is the annuity product retail planning professionals have been looking forward to for a long time. Conceptually, longevity insurance – protection against living too long – functions like a Single Premium Immediate Annuity (SPIA) except that income is set to start at some future date such as age 65, 70.5, 80 or even 85 rather than immediately. That’s the original design where deferred income annuities were meant to be purchased as a safety net that would be there with a very large stream of income very late in life when retirement savings may have been drained due to chronic care and/or long life. Sales were slow and few carriers offered the product. However, in the past two years, insurance carriers began taking a broader approach by offering deferred income annuities that could begin payouts much earlier in the client’s retirement, perhaps deferring income only for a few years before payouts begin.

That Lincoln has rolled it out for retail is significant since this type of product has seen only limited availability from just a few companies like MetLife, primarily for the institutional market, or by NYL for its captive agents. Today’s DIAs enhance the longevity insurance concept by adding liquidity and other features absent from the initial wave of institutional products.

There are a wide variety of planning applications for this type of product. It is a great addition to the existing planning tools, especially in qualified plans. Recent regulatory changes which now allow Qualifying Longevity Annuity Contracts (QLACs), will usher in qualified versions of DIAs that will further propel sales. These qualified ready contracts should begin to hit the market in early 2015. Until then, the main way we see it being used is for the client to set aside a couple percentage points of their portfolio at say, age 65, to purchase protection for the back end of life expectancy and permit a heavier draw down for retirement income before LE. The nest egg will produce more income this way (can be consumed over a shorter timeline) while ensuring that one cannot outlive one’s income. Here’s an excellent paper on choosing DIAs over SPIAs in the planning process. Here’s a paper on QLACs.

The income payments are higher the longer they are delayed to start.  It is important to note that interest factors have risen from recent levels but are still relatively low so there is some risk of locking in today’s low rates for a lifetime. Also, the trade off for high delayed income is that there is no liquidity feature. That said, this is a product that will grow rapidly in importance. Deferred Income Annuities are a quickly growing market with nearly $400 million in industry sales in the first quarter of 2014 and $535 million in the second quarter.

Another interesting application for the product might be for those who cannot obtain LTC insurance due to insurability issues.

The product is approved in most states and was just approved in CA in January 2014.

See below for more information (Client brochure, Facts at a Glance, and Lincoln Leader) and contact us for illustrations. Please keep in mind, for states that have adopted NAIC training requirements, producers should complete a training addendum before soliciting the Deferred Income Solutions product.

LFG DIA Facts at a Glance

LFG DIA Client Brochure