You can have a peace of mind knowing there’s consistent income coming in as if you were working in retirement.
What Is A Deferred Income Annuity?
A Deferred Income Annuity (DIA) is a deferred annuity that distributes a future income stream during retirement, similar to a pension plan. A deferred income annuity is a contract between a consumer and an insurance company like an immediate annuity. The consumer gives the insurance company a lump sum of money upfront. In exchange, the insurance company guarantees a pre-determined stream of annuity payments beginning at a specified later date.
Also known as a Longevity Annuity, Delayed Annuity, or Personal Pension Plan, a Deferred income Annuity works like a pension plan where you invest money now seeking a guaranteed, lifelong income in the future.
Some deferred income annuities allow additional contributions, and some do not.
The annuity payments to you are irrevocable after the income start date. Irrevocable means there is no refund or flexibility during the income distribution phase, so be careful when making your annuity purchase decision.
Immediate vs. Deferred Income Annuity
The main difference between immediate and deferred annuities is when benefits are paid out. An Immediate Annuity (SPIA) requires the first 12 months of opening your contract with the income start date. A deferred annuity requires you to start the income phase in the future, typically with a deferral period of at least 1 year after your initial investment. Typically the deferred annuity can defer your income up to 30 years. The deferred income annuity calculation offers higher income payments the longer you defer your income start date.
Who should consider a Deferred Income Annuity?
Longevity annuities are not a good annuity solution for everyone, but the pension plan alternative can be the right annuity for a specific type of person, primarily pre-retirees seeking a fixed income in their retirement planning.
If you’re planning to live on a fixed income for essential expenses in retirement, a longevity annuity might be a good financial product to “layer” an additional income stream on top of social security benefits.
If you want to add additional deposits regularly throughout your career to build a future income stream, a personal pension plan might be a good fit for you as well.
In most cases, a longevity annuity owner can solve for their desired amount of future income today, creating a path for the owner to follow.
Have plenty of liquid assets for emergencies if you decide on this annuity purchase. Remember, you’re going to be stuck with the issuing insurance company for a long time, so ensure the financial strength is strong.
Deferred Income Annuity Pros and Cons
|Income Riders||Deferred Income Annuity|
|Guaranteed income for life||Guaranteed income for life or fixed period of time|
|Flexibility to start/stop income stream||Tax-favored withdrawals on nonqualified annuities|
|Potential paycheck increases for inflation.||No additional fees|
|Costs range from no cost to 1.25% annually||Irrevocable payments; No refunds|
|Potential to earn interest||Can be surrendered before receiving income|
|Future income guaranteed today||Can not be surrendered after receiving income|
|Can be surrendered or cashed in||Earns approximately 1% interest annually|
|Lump-Sum Death Benefit||No liquidity|
|Help with long term care costs||No death benefit or series of payments|
|Standard liquidity||Can not help healthcare costs|
- The annuity policy can generate higher payout rates to you than an income rider (variable annuity, fixed annuity, fixed indexed annuities) will in some cases.
- The annuity payments to you are guaranteed. You can choose how often you collect your retirement paychecks, typically on a monthly, quarterly, semi-annually, or annual basis.
- You can have peace of mind knowing there’s consistent income coming in as if you were working during retirement.
- It offers an irrevocable stream of retirement paychecks, which means once the income start date has begun, there’s no turning the annuity payments off.
- Little to no regular liquidity features like fixed index annuities or variable annuities.
- Sometimes there’s no death benefit such as a life annuity, for example.
- The return rate is low, and typically there is no cash value to grow during the deferral period.
You receive guaranteed income for as long as the Annuitant lives, but with no payments after the Annuitant’s death. This option should not be chosen if you want someone to receive payments after the Annuitant’s death.
Joint and Contingent Life Income
Income payments continue for as long as either the annuitant or contingent annuitant lives. Thus, the joint-life income amount will be paid in full while the annuitant is alive.
If the annuitant dies before the contingent annuitant, payments will continue at the rate you requested in your application and be paid for as long as the contingent annuitant lives.
Payments will cease at the death of both the annuitant and the contingent annuitant.
Income for a Fixed Period
Payments are guaranteed for the number of years and months chosen in the application. If the Annuitant dies before the end of the fixed period, a death benefit, consisting of a lump sum equal to the commuted value, will be paid. The death benefit recipient may elect to receive the remaining guaranteed annuity payments, as scheduled, instead of the commuted value.
Life Income with a Guaranteed Period
You are guaranteed to receive income payments for as long as the annuitant lives. However, if the annuitant should die during the guaranteed period you selected, you or your beneficiary will receive the remaining guaranteed payments.
Life Income with Installment Refund
Your payments will begin on the income start date and are guaranteed to continue for the annuitant’s lifetime.
If the annuitant dies before receiving the total annuity payments at least equal to the initial purchase price, payments will continue to the named primary beneficiary until the sum of all payments equals the original purchase price.
Life Income with a Cash Refund
Your payments will begin on the income start date and are guaranteed to continue for the annuitant’s lifetime. However, if the annuitant dies before receiving total annuity payments at least equal to the purchase price, the difference will be paid to the named beneficiary in a lump sum.
Inflation Adjusted (Cost of Living Adjustment)
An optional feature in which you elect a lesser initial income amount upfront with annual increases for inflation.
How Do Deferred Income Annuities Compare?
|Access To Principal||Yes||Yes||Yes||No||No|
|Control Over Money||Yes||Yes||Yes||No||No|
|Long-Term Care Help||Yes||Yes||Yes||No||No|
What Do My Beneficiaries Receive When I Die?
If the owner of a Deferred Income Annuity dies before annuitizing the contract, the annuity’s balance will be provided to beneficiaries. If the owner dies after receiving payments, the beneficiaries may or may not receive a death benefit depending on the payout selected by the owner.
Helpful tip: If you want to leave money to your beneficiaries, life insurance might be a better option for you. In some cases, you don’t need to take a medical exam. Use our tool to shop life insurance quotes online, free of charge. Coverage starts at $9.37 per month.
When you receive your longevity or deferred income annuity contract, carefully read through and review it. Be sure every feature is what you understood your retirement plan would be. For example, there are disclosures, statements of understanding, or a prospectus to understand better what you have invested in.
Use our deferred income annuity calculator to get a quote.
If you find yourself worried or feel that you haven’t purchased what you understood, there is always a free look period that gives you a set number of days (usually 10 to 30 days) to change your mind about buying an annuity you receive it. If you decide during the freelook period that you don’t want the annuity, you can return the contract.