What Are Contingent Deferred Annuities?

Contingent Deferred Annuities represent a small niche in the annuity industry compared to the lion's share of products; their popularity will grow.
Contingent Deferred Annuities represent a small niche in the annuity industry compared to the lion's share of products; their popularity will grow. Photo By: John Lund / Digital Vision / Getty Images

A contingent deferred annuity is an income guarantee that you can attach to your traditional stock and bond portfolio.

Contingent deferred annuities (CDAs) are the future for annuity type guarantees. They're the CDAs the “silicon valley” of the annuity industry because it's where true product innovation is happening.

This is the product for people who hate annuities or even hearing the word “annuity.”A contingent deferred annuity provides annuity guarantees without actually owning an annuity.

If there was ever an annuity product that gets close to being “too good to be true”, then this is it.

Income riders (benefits attached to a policy) are offered on most deferred annuities, like variable or indexed, and provide a lifetime income guarantee that can be accessed when needed. A contingent deferred annuity is like having an income rider, but instead of being included within a typical annuity structure, it is attached to your portfolio.

CDAs Create a Good Foundation of Contractual Income Guarantees Within a Growth Portfolio

For people that hate annuities but love annuity type guarantees, this is the product for you. After all, you can’t hate annuities, and love your Social Security payments at the same time. That’s called “income hypocrisy.” The same rationale applies to contingent deferred annuities and is probably the genesis for the product being developed in the first place. The CDA is the answer for the investor that just does not want to give up managing their growth portfolio, but in the back of their mind, they know a foundation of contractual income guarantees will be needed in the future.

You Can Keep Investment Potential, and Have Income Guarantees Too

Most people need additional guaranteed income to combine with the Social Security, pension, or other investment income payments they expect to receive. The CDA structure allows you to have that future income guarantee without having to buy a typical surrender charge type annuity.

In addition, your investments can remain in traditional stock and bond type investments while retaining the needed income guarantees through that CDA structure.

CDAs Are Relatively New, Offer Limited Investment Opportunities, and Annual Fees May Be High

Contingent deferred annuities are relatively new and there are limited offerings currently available. This will definitely change over time, but for now, it’s slim pickings. There are a handful of companies that are currently offering this CDA strategy, and the product popularity is growing as consumers become aware that this progressive strategy is available and learn how it works.

Current CDAs require limitations on what type of portfolio it can be attached to. For example, you can’t have an overwhelmingly aggressive portfolio, and then attach a CDA contractual income guarantee to it. Most current CDA portfolio requirements are somewhat limiting from an overall investment standpoint, even though it allows traditional stock and bond holdings.

Lastly, the annual fees for some CDAs can be high, with those fees being deducted from your investment portfolio totals. 

The Truth Is That Contingent Deferred Annuities Are the Future for the Annuity Industry

Just like with any innovative product launch, there will be bumps in the road and mistakes made as the public becomes aware that this type of annuity (which is not an annuity) guarantee is available.

With more than 10,000 baby boomers retiring every day, common sense determines that a majority of them will need some type of an additional guaranteed income stream to contractually solve for longevity risk (i.e. outliving their money). Because the annuity industry has earned its bad reputation through unregulated sales practices, the CDA “annuity, but not an annuity” guarantee will become an attractive alternative to the traditional annuity product.​

Just like with the portable phone, computers, IPads, and music streaming, contingent deferred annuities will improve over time as demand for the product increases. That’s good news for consumers and very good news within the jaded annuity industry.