* Icatu to boost stake in Banco do Brasil's Brasilcap unit

* Deal is part of Banco do Brasil's insurance revamp

SAO PAULO, Jan 6  - Banco do Brasil (BBAS3.SA), Brazil's largest bank by assets, on Wednesday said it would combine its annuity business with Grupo Icatu, betting on rising demand for the savings plans as household income expands.

As part of the agreement, the companies will buy out other shareholders in Brasilcap, the Banco do Brasil unit that sells annuities.

State-run Banco do Brasil started to reorganize its insurance, pension and annuity business in October, part of a broader move among Brazilian banks seeking to generate more revenue from insurance as households have more disposable income to spend in retirement and financial services.

Analysts have also said declining interest rates, which are eating into banks' profits, are forcing lenders to diversify their revenue sources.

Banco do Brasil controls Brasilcap through its BB Seguros insurance unit with a 49.99 percent stake, while Icatu holds 16.67 percent.

After the transaction, Banco do Brasil will own 75 percent of Brasilcap's shares, with its voting stake unchanged at 49.99 percent. Icatu will control 25 percent of Brasilcap's shares, with its voting stake rising to 50.01 percent from 16.67 percent.

Banco do Brasil shares firmed 0.9 percent to 29.85 reais in early-afternoon trading in Sao Paulo, compared with a 0.4 percent gain in the benchmark Bovespa index .BVSP. (Reporting by Elzio Barreto; editing by John Wallace)