According to a recent article from InsuranceNewsNet, inquiries about life-only guarantees on income annuities jumped to 26% compared to the previous year, at 22.4%. This is the third year in a row that significant increases in these inquiries were observed. Experts believe this is a result of advisors valuing a higher payout over a death benefit.
“When we looked at the data internally that kind of raised some eyebrows,” said Gary Baker, president of CANNEX USA.
The trend quotation data was for single premium immediate annuities (SPIAs) and deferred income annuities (DIAs). SPIAs have an income start date with 13 months less while income start dates for DIAs equal to or longer than 13 months.
It’s true that income annuity life-only guarantees experienced the highest growth, the most common query over the same three-year time period was for a SPIA or DIA with a cash refund guarantee. A cash refund guarantee means that the beneficiary gets the remaining deposit or premium less any payments received to date. For example, if the annuitant received $30,000 worth of payments on a $100,000 income annuity and then passed away, the beneficiary gets $70,000.
During the same time period, inquiries for the life with five-, 10-, 15-, and 20-year guarantees fell over each of the past three years. Life with a 10-year guarantee means that if the annuitant dies within the first 10 years while receiving income, the beneficiary gets the remaining income stream. If the annuitant dies in the third year, the beneficiary receives the remaining seven years of payments.
The increase in queries about life-only guarantees could be an indication that financial planners are using income annuities to solve for income as opposed to leaving a legacy.
“It’s an indicator that financial planners who sell these products continue to take more of a planning approach versus a product sales approach,” Baker said.
Another reason that advisors are looking for life-only clauses on SPIAs and DIAs could be the implementation of the Department of Labor’s fiduciary rule, which was intended to urge advisors to use a planning approach to apply a best interest standard toward clients.
If an investor chooses a life-only guarantee on an income annuity, if they pass away, whatever money is left stays with the insurance company and isn’t distributed as a benefit to a beneficiary. Because there is no benefit at death, the periodic payments made while the contract owner is alive are higher than an identical income annuity with a death benefit. If financial planners are using SOIAs and DIAs to solve for income, they are likely using other types of investments and life insurance to meet legacy needs, according to Baker .
The breakdown of all advisor queries submitted last year is as follows:
- 39.4% for cash refund
- 26% for a life-only guarantee
- 15.2% for a life with 10-year guarantee
- 5% for a life with five-year guarantee
- 4.8% for a life with 20-year guarantee
- 3.6% for an “other” guarantee type
- 3.1% for an installment refund
- 2.9% for a life with 15-year guarantee
Written by Rachel Summit