Understanding Deferred Income Annuities
A Deferred Income Annuity (sometimes referred to as an "Longevity Annuity") or a "DIA" may be the right annuity for you if you are looking for payments that begin at a future date (from two to thirty years from now) and continue for the rest of your life, a spouse's life, and/or for a specified period of time.
If you are familiar with immediate annuities then a DIA can be thought of as an immediate annuity with a delayed start date. In many respects these two types of income annuities are alike (except for when payments to you begin). You can buy a DIA from an insurance company with either a single lump sum amount called a single premium, or with multiple deposits over time.
If you'd like to see a deferred income annuity calculation, simply enter your age, income start date, and amount to invest, in our Deferred Income Annuity Quote Calculator, and click the Get My Quote button. Your quote will appear instantly on the next page.
How does a deferred income annuity work?
In return for your lump sum, the insurance company promises to make regular payments to you (or to a payee you specify) starting at a specified date for the chosen length of time – most commonly for the remainder of your life, however long that may be.
When choosing a deferred income annuity, you can choose how frequently you receive payments – often referred to as the “mode.” While deferred income annuity buyers typically choose to receive payments monthly, you may choose quarterly or even yearly instead.
In today’s deferred income annuity marketplace, there are a number of ways the annuity can be customized to suit your specific life situation and concerns. In exchange for the guarantee of payments, you give up the right to demand the return of your original premium. Unlike some forms of life insurance or other types of annuities, you are generally unable to revise or cash in the deferred income annuity once the 10-day "free look" period has passed.
You can fund your deferred income annuity in a number of ways, including:
1. Cash from a maturing Certificate of Deposit (CD).
2. Exchanging monies accumulated in a Deferred Annuity account.
3. Proceeds from the sale of stocks, bonds, a home or a business.
4. A lump sum distribution from a tax-qualified defined benefit or 401k, Traditional IRA, or a Roth IRA account.
Why should I consider buying a Deferred Income Annuity? What are its advantages to me?
A deferred income annuity comes with many important advantages. Here are just a few:
The annuity provides stable lifetime income which can never be outlived or which may be guaranteed for a specified period. This advantage is crucially important to annuitants who may have previously feared outliving their savings.
An annuity is pretty much “get it and forget it.” Once it is set, the only work you are required to do is collect your regular payments. With a deferred income annuity, you do not need to watch markets or track interest rates and dividends.
The interest rates used by insurance companies to calculate deferred income annuity income are generally higher than CD or Treasury rates. Since part of the principal is returned with each payment, greater amounts are received than would be provided by interest alone.
I contacted Immediate Annuities.com to buy one of my immediate annuities. They were prompt, very responsive, paid attention to detail, understood my objectives, and were superb when it came to staying on top of seeing the funds transfer and issue of new policy documents through to completion.
Preferred Tax Treatment
A deferred income annuity may be a good strategy to defer taxes until later in your retirement when you may be taxed at a lower rate. This differs from other types of annuities for which the tax burden is “front loaded.”
Safety of Principal
Funds are guaranteed by assets of insurer and not subject to the fluctuations of financial markets.
No sales or administrative charges
Deferred income annuities do not have annual account management or maintenance charges. 100% of your premium goes towards your monthly income.
How can you customize a deferred income annuity?
You may hear a lifetime deferred income annuity called by a number of different names, including "Single Life," "Joint Life," "Life and Period Certain", or "Refund" annuity. Regardless of its name, by ensuring that you will never outlive your income, a life annuity is a powerful retirement planning tool. What’s more, a life only annuity generally offers the highest payout of any lifetime annuity, because it carries the smallest risk for the insurer.
When you shop for a deferred income annuity, you will find that one of the key factors in pricing is your age and life expectancy. In a sense, purchasing a deferred income annuity is like making a bet with an insurance company about how long you will live. Since the insurer will stop making payments when you die, it is betting that you won't live beyond your life expectancy. On the other hand, if you live longer than predicted, your return may be far greater than estimated.
Deferred income annuity coverage can be increased by including a second person ("Joint and Survivor" annuity), by adding a guaranteed period of time ("Period Certain" annuity), or by guaranteeing that payments will continue at least until the original purchase amount has been paid out ("Refund" annuity). This added risk to the insurer is likely to reduce monthly payments by about 5% to 15%, depending on the age of the annuitants and the length of the guarantee period.
You may want to consider a deferred income annuity with special options if:
1. You wish to guarantee lifetime income for both yourself and a spouse ("Joint and Survivor" annuity)
2. You want payments to continue for a specified period (e.g. 5 or 10 years or more) to a designated beneficiary ("Certain and Continuous" annuity)
3. You want to ensure that should you die before your initial principal has been distributed, an amount equal to the balance of the deposit continues to a named beneficiary ("Refund" annuity).
What about funding my annuity? Can you explain the difference between qualified and non-qualified funds?
The way your annuity payments are taxed depends upon the source of the funds you use to purchase it.
Qualified Deferred Income Annuities
When applied to deferred income annuities, the term qualified refers to the tax status of the source of funds used for purchasing the annuity. These are premium dollars which until now have "qualified" for IRS exemption from income taxes. The whole payment received each month from a qualified annuity is taxable as income (since income taxes have not yet been paid on these funds). Qualified annuities may either come from corporate-sponsored retirement plans (such as Defined Benefit or Defined Contribution Plans), Lump Sum distributions from such retirement plans, or from such individual retirement arrangements as IRAs, SEPs, and Section 403(b) tax-sheltered annuities, or Section 1035 annuity or life insurance exchanges.
Non-qualified Deferred Income Annuities
Non-qualified deferred income annuities are purchased with monies which have not enjoyed any tax-sheltered status and for which taxes have already been paid. A part of each monthly payment is considered a return of previously taxed principal and therefore excluded from taxation. The amount excluded from taxes is calculated by an Exclusion Ratio, which appears on most annuity quotation sheets. Non-qualified annuities may be purchased by employers for situations such as deferred compensation or supplemental income programs, or by individuals investing their after-tax savings accounts or money market accounts, CD's, proceeds from the sale of a house, business, mutual funds, other investments, or from an inheritance or proceeds from a life insurance settlement.
Q: What is a Deferred Income Annuity?
A: A Deferred income Annuity (also known as a Longevity annuity or an Advanced Life Income annuity) is a type of annuity contract which allows you to guarantee a future income stream many years in advance of retirement, at a pre-determined future date you choose. You can buy such a deferred income annuity at age 50, for example, and have your payments begin at age 80, three decades later.
Q: Is it a “single premium” or “flexible premium” annuity?
A: Deferred Income Annuities ('DIA') can be purchased with either a single lump sum premium payment or with multiple payments over time (so-called flexible premium purchase). While most deferred income annuity contracts permit subsequent deposits it is important to review the company’s rules about how often you can contribute additional funds and how the company calculates the additional income that is purchased from these later premium deposits.
Q: What are the available payout options?
A: Most DIAs guarantee income payments for the duration of the buyer's lifetime. Some companies also offer joint-life, period certain, and installment or cash refund payout options. Joint-life income options provide guaranteed income payments to you for life or for the life of the named survivor, whichever is longer. Period certain provides guaranteed income for a specified time frame. Should you die during this specified time, the remaining income payments will be paid to your named beneficiaries.
Q: How does the insurance company determine my monthly payment?
A: First and foremost, by delaying the start date these annuities provide you a higher income payment than immediate annuities for the same premium deposit. The amount of income guaranteed is based on the premium amount invested, current interest rates, the length of the delay (deferral) period, and the particular payout income options chosen (period certain or lifetime).
Q: What about inflation?
A: Most DIA contracts offer an optional inflation protection feature which increases your income stream each year by changes in the Consumer Price Index or by a pre-determined cost of living adjustment. This can help to protect the effective buying power of your future income payments. With this rider, your guaranteed income payments will increase annually based upon the CPI or the percentage rate chosen (1% to 6%) at the time of application.
Q: What happens if I pass away before my payments begin?
A: Most DIAs offer an optional rider which pays a death benefit payment to your named beneficiaries if you die before your payments begin (i.e., before the deferral period ends). This allows for either a lump-sum return of the initial premium or sometimes a lump sum return of your initial premium plus interest (as high as 3.00% for each year your annuity was in deferral). Without such a rider, your premium would be forfeited in the event of your untimely death prior to the time your income payments begin.
Q: Am I able to change the date when my payments begin?
A: Many DIA contracts make you choose your predetermined payment start date at the time of purchase. However, some contracts allow you to alter your payment start date even after your annuity has issued. For example, some companies allow you to move your payment date forward or back by as much as five years. Moving the payment date forward would decrease your payment amount, while moving it back would increase your payment amount.
Q: What if an emergency arises and I need to access some extra money?
A: Some DIA contracts offer limited liquidity features, which allow the owner to request some payments in advance to cover unexpected financial situations.
Q: Is a Deferred Income Annuity a safe investment?
A: DIAs offer a high degree of safety. Your premium is guaranteed by the issuing insurance company. Insurance companies are legally required to set aside assets (known as “reserves”) to cover potential claims made by their policyholders. Insurance companies are monitored by rating agencies such as A.M. Best, Standard and Poor’s, and Moody’s. By reviewing the ratings an insurance company receives from these agencies, you may be able to determine if it is operating on a sound financial footing.
For quotes and answers to your annuity questions call 800-872-6684.