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Guaranteed Income Amount Depends On Client, Timing

If one of the main reasons to buy annuities is to receive guaranteed income in retirement, then which type of annuities provides the greatest guaranteed income?

CANNEX researchers put a number of different annuities to the test in an attempt to solve that puzzle. The answer is — it depends.

A CANNEX report compared different annuities that have equivalent benefits. Researchers found that the highest guaranteed income product varies significantly depending on the client — whether a man or a woman, a single person or a couple — as well as when income begins.

The report looked at fixed indexed annuities, deferred income annuities, single premium immediate annuities and variable annuities to see which product generated the highest guaranteed income.

It has been assumed that the income annuities always produce the highest guaranteed amount. However, because of product design variations and utilization assumptions, other deferred annuities can outperform the SPIA and DIA. The CANNEX findings demonstrated that there are scenarios where SPIAs, VAs and FIAs produce the greatest amount of guarantee. Furthermore, there are situations where a modest reduction in the guarantee can yield a significant potential for upside.

On the basis of the guarantee alone, the income annuities tend to provide the greatest income for scenarios where immediate income is drawn and also can generate more income for a man than for a woman. FIAs often perform best in scenarios where income is delayed. However, VAs excelled in a number of joint life cases.

Single premium immediate annuities were generally found to provide the highest income guarantee for those planning on drawing immediate income.

But, for a couple who are of different ages, the study found that a variable annuity with guaranteed income may generate the highest annual payments.

A fixed indexed annuity provides a greater guaranteed stream of income than a deferred income annuity or a variable annuity for an individual who wants to begin drawing down money in five or 10 years.

The difference among annuities also shows up when looking at whether the owner is a man or a woman.

For women, the difference in income between an FIA and a DIA is even greater. DIA benefit payments for women are lower than they are for men, based on longevity expectations. The longer the delay in taking income, the greater the benefit for women who choose an FIA over a DIA. For example, based on a $100,000 premium investment in a DIA at 65 years old, a woman of average projected longevity would receive, after 10 years deferral, around $11,700 in annual income, versus approximately $12,900 for a man. By contrast, an FIA could generate as much as $14,313 of annual income for a woman or a man.

For a single annuitant, the greater the delay in taking income, the more likely that an FIA provides a greater income guarantee than either a DIA or a VA (See chart). In some instances, the VA also has higher guaranteed income than the DIA, although not as much as the FIA does. The effect is more pronounced for women than it is for men because DIA rates are lower at the same age due to longevity expectations.

Looking at gender, the CANNEX researchers found that a single woman is likely to see an even greater gain from an income guarantee in a savings annuity. At age 70, there is a stark difference between guaranteed income for men and women. If there is no delay in taking income, the income annuities provide higher income for both men and women. However, with a delay, men obtain higher income from income annuities, while women receive higher income from FIAs.

For couples who own annuities with joint life contracts, each category of annuity performs best depending on the specific scenario.

Researchers looked at an example of a 65-year-old man and a 60-year-old woman. They found that a VA outperformed a DIA, SPIA and FIA in generating income. However, a SPIA or DIA came in a close second to a VA if there was no delay in taking income. Meanwhile, an FIA outperformed a DIA and a SPIA if income was delayed by five or 10 years.

Upside Potential

The CANNEX analysts looked at the circumstances where the upside potential of an annuity is effectively a “bonus” on top of a guarantee that is already higher than the corresponding income annuity.

The research showed that FIAs were the highest over VAs and DIAs in terms of minimum guarantee when looking at the income performance for a 60-year-old woman taking a 10-year income delay.

It’s a different situation when looking at a 60-year-old couple who aren’t delaying taking income. In this case, the DIA generates the highest guaranteed income as well as the highest average income.

Where Living Benefit Guarantees Come Into Play

Although income annuities are designed to be efficient vehicles to provide clients with guaranteed income, there are circumstances where living benefit guarantees provide higher levels of guaranteed income and the possibility of even greater income due to market upside, the CANNEX researchers found.

In the scenarios examined in the research, SPIAs generally provide the highest guaranteed income for those looking to start payments right away. However, FIAs and VAs are more likely to fare better with a delay. Here’s why.

Most guaranteed living withdrawal benefits include deferral bonuses and other incentives to start taking income years after the annuity contract was purchased. These increases appear to exceed the income boost that the DIA provides from a similar delay. The DIA benefits from mortality credits in combination with the underlying return assumptions for assets that the insurer holds during the delay period, but the income definitely begins at that point.

In contrast, withdrawals may begin at any point in the contracts with GLWBs. Therefore, insurers position most of these riders to encourage policyholders to delay using them. 

Although the research looked specifically at maximum guarantee amounts, it does not address the other differences among annuities that would cause an advisor to recommend one product over another.

For example, researchers said, a DIA may not have the highest guaranteed income for a client but it is difficult to misuse. Meanwhile, the flexibility of a GLWB may be beneficial to one client but may be dangerous to another. It is possible for the client to take out too much money and unintentionally disrupt the income guarantee, while investment decisions for the portfolio may be confusing and onerous.

It’s important to determine the guarantee values and potential for additional upside for clients who have income needs, CANNEX researchers concluded. It’s also important to assess a broader selection of products to meet those income needs. However, the researchers concluded that there is no conventional wisdom that dictates the best product to generate that guaranteed income.

“We were surprised that all three products — SPIAs, FIAs and VAs — had places where they excelled,” said Tamiko Toland, CANNEX head of annuity research.

“Although we have these rules of thumb, they’re not always good rules of thumb,” she continued. “For example, we say usually if you’re taking income immediately, the SPIA is best. But there are examples where a VA is actually better, even if you’re taking the income on day one, which is actually surprising.”

Another surprising finding, Toland said, was that DIAs don’t always generate a large amount of income if there is a delay in taking income. “At age 70 for men, you see a DIA actually does really well after a five-year or a 10-year delay, but those are not common delays. Usually, folks who are taking income at age 70 are taking it immediately. So that may be one reason for that.”

The core lesson of the research is: check and compare results across categories for each client scenario before settling on a specific product.

“If you have a client who has an income objective, then it’s really important to look across product types and figure out what’s going to be best for that client,” Toland said. “If you want to look at purely the income guarantee, we see just on that basis alone there are circumstances where any three of these product types might be best.

“There are many factors that go into the selection of an annuity. Income generation is not the only one, but it is central to their value proposition and advisors need to rely on real analytics, not traditional perceptions or best guesses of how guarantees work, to best serve their clients.”

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Follow her on Twitter @INNsusan. Contact her at [email protected].

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