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No-Return Deferred Income Annuities Greatly Increase Payouts

Deferred income annuities have skyrocketed in popularity over the past couple of years because of their affordable guarantees and their increasing use as QLACs in defined contribution plans. There is a new trend with deferred income annuity products that could drastically increase those already valuable payouts. Cyril Tuohy said that this “Hot Deferred Annuity Trend Can Nearly Double (your) Payout” in an article for Insurance News Net. You cannot outlive the income payments you receive from deferred income annuities, which is one of their main benefits. These DIAs, or longevity annuities, pay you income later in life. The later you wait to start receiving income, the higher your payouts. It’s a similar concept to delaying Social Security payments until age 70. Many people who are worried that they will die before receiving payments or die before “getting all of their money back” choose to add a return of premium benefit to their DIA. This ensures that one’s heirs will continue to receive income until they reach the total premium amount put into the annuity.

The newest trend with deferred income annuities is opting out of the return of premium benefit. This drastically increases your payouts, to the point where some annuitants get all of their premium back in just three years. The no-refund option is a great deal for the right person, but is not right for just anybody. For example, a 65-year old can purchase a $100,000 deferred income annuity and choose to start receiving payments at age 80. If they include the return of premium benefit, they will receive approximately $18,000 per year for as long as they live. By opting out of that benefit, they could receive $30,000 per year and recoup their entire premium amount in just over three years. This scenario works especially well for those who have income to cover their lifestyle from age 65 to 80 or 85 and are more concerned about needing more income later in life.

How do insurance companies afford to pay this higher income? It’s just fact that some people who purchase these annuities will die before receiving all of their premium paid back to them. Their money goes to pay income to those who live longer. Many annuitants are willing to take that risk in order to get the higher payouts starting at age 80 and beyond. Most of those people who opt for the no-return deferred income annuity have money somewhere else that they plan to leave to their heirs. Insurance companies have software that can easily demonstrate the difference between a DIA with a return of premium option and one without.

LIMRA is working on in depth research right now about deferred income annuities and single premium immediate annuities that they will release later this year. Deferred income annuity sales are small compared to sales of other types of fixed annuity products, but they are significant because of how fast they have grown over the past two years. While DIA sales were down during the first half of last year, total yearly sales were still twice as much as they were a just a couple years ago. There are still a lot of advisors skeptical about selling annuity products, but the industry is working to change this. As more RIA’s get on board with longevity annuities, they will be able to protect their clients against living too long. Deferred income annuities offer unique benefits for creating income later in life. Many people are opting out of the return of premium benefit with their deferred income annuities in order to greatly increase their yearly payouts later in life.

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