Facts About Deferred Income Annuities
Deferred Income Annuities (aka DIAs) are also called Longevity Annuities and even referred to as Longevity Insurance. DIAs solve for ‘longevity risk’, which is the risk of outliving your money. DIAs are definitely growing in popularity as a demographic tidal wave of baby boomers and retirees are looking for real income guarantees. Below are 10 quick facts that you need to know about DIAs.
DIAs Provide an Income Later Solution
DIAs solve for target date income planning, or what I refer to as “income later.” DIAs allow you to defer as short as 13 months and as long as 45 years before the guaranteed income starts.
DIAs have No Annual Fees
DIAs have no annual fees, no moving parts, and no market attachments. You are, in essence, buying income to start at a future date of your choice.
There are Low Agent Commissions on DIAs
All annuity commissions (regardless of type) are built into the product. That includes DIAs. In other words, you will not see the commission ‘taken out’ of your premium even though the selling agent does get paid. Agent compensation is paid by the issuing carrier, and from their company reserves. It’s a net transaction to you, but there is a ‘built in’ commission.
Deferred Income Annuities have No Moving Parts
DIAs have no moving parts, no accumulation value, no market attachments. DIAs are a future income guarantee that is primarily based on your life expectancy at the time you start the payments.
DIAs Provide Limited Liquidity
DIAs have limited or no liquidity depending on the specific product or carrier and also based on how you structure your specific policy.
The rules vary, but in my opinion, you should not purchase a DIA if there is a potential need for liquidity with the asset in question. DIAs are not designed for liquidity, and any liquidity provisions that you might build into the contract will negatively affect the income guarantee.
Laddered DIAs are a Good Strategy
DIAs can effectively combat inflation by using multiple policies with different income start dates.
This is called “laddering income”, and is a good way to use the DIA strategy.
COLA Riders can be Added On to DIAs
Cost of Living Adjustment (COLA) riders can be added to your DIA policy to contractually increase payments on an annual basis. CPI-U (Consumer Price Index) riders are also available on some DIA policies as well. It’s important to know that when you add these contractual income increases, the issuing annuity carrier lowers the initial starting payment when compared to the same DIA without that attached rider.
Deferred Income Annuities Provide Annuitized Payouts
DIAs income streams are “annuitized” and irrevocable (i.e. can’t be shut off) once the income stream starts. Annuitized income streams used in a non-IRA account can provide significant tax benefits because the income stream is a combination of the return of principal with interest. The interest portion is the only part that is taxable.
There are Numerous Structuring Choices Available Using DIAs
There are numerous ways to customize your annuitized payouts. You can choose a period certain, a lifetime guarantee, or a combination of both. It’s your call.
Defer DIAs as Short as 2 Years and as Long as 45
DIAs are typically deferred as short as 2 years and as long as 45 years.
Once again, it’s your decision how you want to customize the policy and how you want to contractually solve for your specific income need.
DIAs are growing in popularity because they are simplistic and easy to understand solutions for income later needs. In July of 2014, another version of a DIA was introduced to be used inside of a Traditional IRA. That product is called a QLAC (Qualified Longevity Annuity Contract).