Compare and Contrast: Income Annuities and Savings Contracts

CANNEX has published a detailed white paper for advisers, “Guaranteed Income Across Annuity Products: Withdrawal Guarantees Compete with Income Annuities,” which divides annuities into two categories to help guide client conversations—those designed primarily to provide income, and those designed primarily as savings vehicles.

According to paper’s trio of expert authors, all annuities are meant to generate income, but the underlying designs and features can vary quite a bit and are best discussed with clients through these two lenses. Mapping out the landscape of “income annuities,” the white paper points to single premium immediate annuities (SPIAs) and deferred income annuities (DIAs). The category also includes qualified longevity annuity contracts (QLACs), which are described as “qualified DIAs that allow for income deferral past the age of required minimum distributions.”

On the side of savings annuities, the paper cites variable annuities (VAs), fixed-indexed annuities (FIAs) and fixed-rate annuities (FRAs), which are also known as multiyear guaranteed annuities. This category also, according to CANNEX researchers, includes registered index-linked annuities (RILAs), which are also known as “structured,” “buffered” or “variable-indexed annuities.”

Distilling down their findings, the paper authors offer some relatively simple rules of thumb that can serve as a jumping off point for advisers and their clients to asses all these annuities flavors. Of course, different types of annuities provide the highest income guarantee depending on an individual’s or family’s unique financial scenario, and therefore every adviser seeking to maximize guaranteed income should consider different product types.

“The single premium immediate annuity often provided the highest income guarantee when there was no delay in receiving income,” the authors find. “For single life contracts with a delay, fixed-indexed annuities with a guaranteed lifetime withdrawal benefit (GLWB) generally provided the highest income guarantee. For couples, variable annuities (VAs) often provided the highest income guarantee. This is particularly true where there is a difference in spouses’ ages.”

According to the CANNEX researchers, most savings annuities do not have different prices according to gender.

“Consequently, women are more likely to achieve higher income from guarantees on these contracts,” they say. “Furthermore, in situations where income annuities have unisex pricing, savings annuities may provide the highest income guarantee. There are many cases shown within this research where the income guarantee for one of the savings annuities is nominally lower, but where there is a significant potential for upside due to market increases.”

Based on the results of their study, the researchers say it is important for advisers who are looking to provide clients with guaranteed income to consider both income annuities and savings annuity contracts that offer GLWBs in order to secure the highest amount of income.

“Savings annuities also offer the potential to take advantage of market increases, often with the safety net of a guarantee that is similar to or higher than that of the income annuity,” they say. “There may be additional reasons to select a particular contract or product type. Nevertheless, the amount of guaranteed income remains an important consideration for any purchase.”

More annuity basics for clients (and advisers)

As the white paper spells out, one key difference between income annuities and savings annuities is that the lifelong annuitization is fully exercised with the immediate income annuities.

“Furthermore, there are GLWBs available on VAs and FIAs that provide a flexible lifetime income payment that may or may not be exercised, even if elected,” the authors say. “With these products, there is always going to be a segment of buyers that never take payments on their guarantees. Assumptions around utilization are built into the cost and, therefore, are ultimately reflected in the value to the client.”

According to the white paper, one key difference between life annuitization and GLWBs is that life annuitization takes advantage of mortality credits. In other words, “all of the buyers intend to start taking income.”

“Of course, some will die ‘early’ and those that live ‘late’ are the beneficiaries of that statistical fact,” the authors say. “In this instance, the assumptions built into the pricing are based on death rather than elective utilization. The latter varies considerably by insurer, since different sets of clients are likely to have different needs and behave differently.”

Shared in the white paper is “one very straightforward example” demonstrating how this phenomenon can be seen in comparing qualified and non-qualified annuities. Citing LIMRA data, the researchers show required minimum distribution rules in place for tax-qualified assets (starting at age 70.5) tend to greatly increase utilization of the GLWB. By age 72, 60% of policyholders with a VA within an individual retirement account (IRA) are using their GLWBs, but less than 30% of those using non-qualified assets do so.

“Clearly, expectations around the ratio of buyers using qualified money to purchase their annuities would greatly affect utilization assumptions,” the researchers conclude. “Utilization assumptions also extend to adviser behavior and how efficiently these professionals use a contract. There are many assumptions, pricing preferences, and differences in clientele that multiply to create variations in how insurers manage these businesses. Externally, it is difficult if not impossible to ascertain how these factors will affect the income the client receives. The new era of innovation in both the annuity contracts themselves and the available guarantees—compounded by fundamental pricing and assumption differences in the products—creates the possibility that the type of annuity that generates the most income may be different depending on the characteristics of the buyer(s).”

The white paper’s authors are Tamiko Toland, head of annuity research; Branislav Nikolić, senior quantitative analyst; and Simon Dabrowski, quantitative analyst. The full findings can be downloaded here.