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LONGEVITY INSURANCE – DEFERRED INCOME ANNUITY

Deferred income annuities are a financial product that, by definition, are paid in one premium and payout after at least one year after purchase. While they have been around for quite some time, although they are only beginning to come into their own as a part of a sound retirement strategy. Deferred income annuities are more colloquially known as longevity insurance, especially when purchased by retirees for when they reach 80 to 85 years of age. Much of the increase in sales for longevity insurance can be tied to an IRS bulletin formally published in The Federal Register on July 21, 2014 that allows for the recipient of the deferred income annuity to defer taxation until the age of 85. As with any formal federal rulemaking determination, there is a long period of time for study and public comment. As such, on February 2, 2010 the Departments of Labor and Treasury publicly requested comment on the issue of allowing for use of these annuities, with a second round with a specific regulation tied to it, that commenced on February 3, 2012.

 

HYRBRID ANNUITY

 

Traditionally there were generally two types of annuities. The first is the variable annuity with guaranteed benefits and the second type is the immediate annuity. The variable annuity with guaranteed benefits is wildly popular, with $39.8 billion in sales in just the first quarter of 2011 alone. Often these annuities do not encourage or sometimes even permit the beneficiary to tap into the annuity until years after the initial purchase.

 

One of the complaints about this type of annuity is the rather large costs associated with them and that these costs are not usually set in the contract. Rather they change over time, based on market conditions and other variables. As a result, despite the extremely lucrative market for the variable annuity, it is shrinking in size just the same. The immediate annuity on the other hand pays out in many ways like a life insurance contract in reverse. In life insurance an insured pays the insurance company a premium for many months and years. The insured’s death triggers a pay out. The immediate annuity, on the other hand, works with the annuitant paying an investment company a one time premium and the investment company pays the annuitant a specifically defined stream of income over time. The deferred income annuity is a hybrid between the two annuities. Like an immediate annuity, the stream of income is specified in advance, although like a variable annuity they do not pay out for quite some time.

 

GROWING IN POPULARITY

 

While they only captured approximately $2 billion dollars of the annuity market in 2014, they grew in comparative strength by 35% compared to 2013. Compared to the overall variable annuity market, which stood at $140 billion in 2014, they are small fish in a big sea. The overall annuity market is a whopping $235.8 billion. Given that the deferred income annuity was only offered by three insurance companies in 2011 but 16 in 2015 it seems likely that this product will grow in overall percentage of the market place. In addition to the tax treatment noted above, further refinement of the product occurred. For example, in earlier policies, if an annuitant passed prior to payout, he/she forfeited this money. Today’s policies often have a death payout as well as protective measures against inflation.

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