Deferred-income annuities offer certainty but limitations too.
Lincoln National Corp. is rolling out its first deferred-income annuity, jumping into a small but rapidly growing product category.
The carrier, which already has a major presence as a seller of variable and indexed annuities, today launched Lincoln Deferred Income Solutions, an annuity that permits clients to pay now for a stream of income they'll receive years from now. With Lincoln's new annuity, clients will find out exactly how much money they'll be getting at the outset. That income stream won't change over the course of the contract.
Deferred-income annuities are a tiny but growing corner of the annuity market. Year-to-date through June 30, sales reached only $930 million, a drop in the bucket compared with the $34.5 billion in total fixed-annuity sales for the same period, but up 151% from the $370 million sold in the first six months of 2012, according to Limra.
Thus far, the majority of deferred income annuities sales are coming from captive agents, which makes sense since the companies these agents work for are the same mutual insurers that are manufacturing the annuities. Forty-three percent of all sales are coming from captive agents, according to Jeremy Alexander, chief executive of Beacon Research Inc. Twenty-seven percent come from large regional broker-dealers. “As players like Lincoln get into the market, you'll see more independent producers on board,” Mr. Alexander said. “The large captive insurers have the luxury of having control over their reps, whereas the other make the products and see what happens.
A handful of mutual life insurance companies are the biggest players in the field, including New York Life Insurance Co., Guardian Life Insurance Co., Massachusetts Mutual Life Insurance Co. and Northwestern Mutual Life Insurance Co. All-around annuity giant MetLife Inc. also has a product.
Two common adviser and client objections to deferred-income annuities are the fact that clients have no liquidity once they hand their money to the insurer and that heirs will collect nothing once the client dies.
Lincoln hopes to address the liquidity concern by giving clients the flexibility to receive six months of payments in one shot to help fund medical expenses in the event the customer is in a crunch. The insurer also offers a death benefit that can kick in regardless of whether the client dies during the deferral or income phase.
Though clients and advisers generally like the idea of certainty in retirement income, some are turned off by the fact that if they buy the income annuity in a low-interest rate environment such as today's, they will be locking in a smaller income payment in the future. Low rates also hurt insurers' profitability from this product line.
From a risk management standpoint, deferred-income annuities are a boon for life insurers because the products give them a better idea of the size of their liability in the future. Carriers benefit from pooling longevity risk, knowing that in a large group of insured clients, a number of them won't live as long as the others.
