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:
Security
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.
Simplicity
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.
Higher Returns
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 bought two annuities this year and was extremely satisfied with the service from Immediate Annuities.com each time. In short, their staff was courteous, professional, and prompt. I would recommend them to anyone who wants to buy an annuity.
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.
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Comments (38)
Michael
2015-02-02 13:54:25
Just what kind of annuity is this? Is this a variable annuity?
Hersh Stern (ImmediateAnnuities.com)
2015-02-02 14:16:20
Hi Michael,
These annuities are not variable annuities. They are "Deferred Income" annuities. The amounts in a deferred income annuity are fixed and guaranteed.
There is no "variability" or indexing of the monthly income amounts the insurance companies will pay you. Variable annuities are annuities where your premium is invested in mutual-fund-like or bond-like sub-accounts and where the amount of the monthly payments you receive may go up or down.
-Hersh
George
2015-03-11 15:54:00
I'm 51 years old. I see your quotes for age 65. If I waited 16 years to start monthly payments when age 67 instead of 65, does that increase the payments? Would I need to see a whole other set of quotes?
Hersh Stern (ImmediateAnnuities.com)
2015-03-11 16:08:52
Hi George-
Yes, for every year that you delay receiving income from your annuity, your eventual monthly payment amount increases. So if you bought the annuity at age 51 and waited to receive income until age 67, your monthly payments would be greater than if you started receiving income at age 65.
If you'd like to get a personalized quote report with exact numbers for both starting ages, visit the annuity calculator on our home page.
Hersh
Rosa
2015-03-12 09:17:46
I'm thinking about investing in an annuity that will give me income in 10 years. I've read about index annuities with income riders and deferred income annuities. I'm confused about which is better for me. What are the pros and cons of each?
Hersh Stern (ImmediateAnnuities.com)
2015-03-12 09:32:36
Hi Rosa,
You're asking a very popular question. Both types of annuities can generate an income stream starting at a future date. In fact (and I'm about to tell you something you're not likely to hear from other agents) the income streams they both produce are virtually the same. So that should not be the deciding factor. Here are the pros and cons of each product type, as I see it:
Deferred Income Annuity (DIA)
Pros
- Offered by many of the top-rated insurance companies like New York Life, Mass Mutual, Guardian, and MetLife.
- More varied annuity payment options (single and joint life with period certain or refund options)
- Very few bells and whistle, the product features are easily understood
- No fees
Cons
- Less liquidity than an indexed annuity. For example, you cannot surrender your contract. Once you buy the DIA , you are locked into the income stream.
- Less flexibility with your income start date. You must elect your income start date at issue, and you can only change that one time.
Indexed Annuity with Income Rider (also known as a "Hybrid Annuity")
Pros
- More liquid than a deferred income annuity. You can surrender your contract and pull your funds out. Keep in mind that you will be charged surrender fees during your surrender charge period.
- More flexibility. For example, you don't select the income start date when you buy the annuity. You choose when you would like to start receiving income whenever you want.
Cons
- Many of the competitive indexed annuities with income riders are offered by lesser-rated insurance companies. For example, New York Life, Mass Mutual and Guardian Life do not offer fixed index annuities.
- These products can be very complex, making them difficult to fully understand
- There's usually an annual rider fee of 0.50% - 1.00%
I hope this summary helped.
-Hersh
Linda
2015-03-31 09:41:37
Can I buy a deferred income annuity that ties to index performance? i.e. if the market is up, I can participate in the gain of the market and increase the value of my annuity, therefore increase monthly payment amount? Thank you.
Hersh Stern (ImmediateAnnuities.com)
2015-03-31 09:43:29
Hi Linda-
That would be a great idea. Unfortunately, none of the DIA manufacturers offer an indexed DIA option. There are fixed index annuities and hybrid annuities which allow you to delay income payments for years. Also, there are variable annuities which permit you to invest in stock and bond indices. If you'd like further help with a DIA, call me at 800-872-6684. Take care.
-Hersh
Skye
2015-04-20 13:52:35
Can a DIA be purchased for my Grandchildren? I am considering spending $20,000 and my granddaughter is 19.
Hersh Stern (ImmediateAnnuities.com)
2015-04-20 13:54:53
Hi Skye-
Yes, some of the insurance companies we represent issue DIAs to 19 year olds.
If you'd like to receive a spreadsheet with DIA quotes from these companies for you to review you can use our calculator which you can find at the top of this page.
Hersh
Jeffrey
2015-05-11 14:37:32
Are these annuities protected against future inflation?
Hersh Stern (ImmediateAnnuities.com)
2015-05-11 14:38:49
Hi Jeffrey-
You can add a Cost of Living Adjustment (COLA) to a deferred income annuity.
You can read a lot more about COLA riders here:
https://www.immediateannuities.com/immediate-annuities/annuities-and-cost-of-living-adjustments.html
Hersh
Dave
2015-05-12 14:37:15
I am 51 years old. I have after-tax savings that I want to invest in an annuity today and begin receiving monthly distributions from that annuity in 5 years. If I begin withdrawals at age 56 will I be subject to the 10% pre-age-59-1/2 penalty?
Hersh Stern (ImmediateAnnuities.com)
2015-05-12 14:38:20
Hi Dave-
The 10% federal tax penalty will NOT apply if you bought a deferred income annuity ("DIA" aka longevity annuity) which began making payments at age 56 over yours (and a spouse's) lifetime(s). However, if you set up a DIA to begin payments at age 56 for just a limited number of years (for example, only for a 10 or 15 year payout) then the interest portion of your payments is subject to the 10% penalty.
Additionally, if you bought a multiyear guaranty deferred annuity (aka SPDA) or a fixed index annuity (aka FIA) today and removed the gains (interest) at age 56, you'd be subject to the 10% federal tax penalty. The length of the penalty period would be from ages 56 to 59-1/2. You could avoid the penalty if you annuitized your SPDA OR FIA contracts at age 56 for your lifetime (but not if only for a certain period of years).
Hersh
Jeff
2015-08-10 07:12:43
I have an existing IRA (pre-tax) that I was thinking about rolling into a DIA. I am also considering opening a SEP IRA through my business for my wife and I. Can these accounts be combined? I was hoping to keep adding to the same DIA via the SEP.
Hersh Stern (ImmediateAnnuities.com)
2015-08-10 07:14:22
Hi Jeff-
Yes, you can transfer (or roll over) money from your IRA into a DIA. But you need to keep in mind the impact of Required Minimum Distributions ("RMDs") which start when you reach age 70-1/2. So if you're intending to postpone removing money from your DIA until after age 70-1/2 know that you'll need to withdraw RMDs from your non-annuitized IRAs to cover the RMDs of the fair market value of your IRA DIA. You can read more about RMDs here:
https://www.immediateannuities.com/required-minimum-distribution/
Also, very important, in 2014, the Treasury (IRS) relaxed the RMD rules for up to $125,000 of IRA money (or 25% of your IRAs, if less) if your IRA money is inside a so-called "QLAC" DIA. This is a new type of DIA. You can read more about "QLACs" here:
https://www.immediateannuities.com/qlac-qualified-longevity-annuity-contract/
You also asked about "adding to the same DIA via a SEP." Did you mean, you'd like to contribute to a SEP each year and then roll over that amount shortly thereafter into your DIA?
I'm neither a tax attorney nor a CPA and I recommend you consult one about your questions. As far as insurance companies' practices, most of them accept multiple or annual deposits into their DIAs.
Hersh
Dave
2016-01-07 11:57:21
I received your DIA quotes and am evaluating them to see how they fit into my plan. Do any of these DIAs accept a large amount at purchase and then smaller amounts until the payouts begin or even after the payouts start?
Hersh Stern (ImmediateAnnuities.com)
2016-01-07 11:58:08
Hi Dave,
Most deferred income annuities (and indexed annuities) allow you to add additional premiums after the initial purchase. Commonly, they let you add money until about a year before the income is set to begin.
Hersh
Richard
2016-01-08 10:21:56
Do I have to choose a start payment date now or can this be determined at a future date (i.e., let the money earn interest and grow until needed)?
Hersh Stern (ImmediateAnnuities.com)
2016-01-08 10:22:46
Hi Richard-
The answer will depend on the type of annuity you have in mind. An immediate annuity and even some deferred income annuities require you to select a firm start date when you buy the annuity.
There are other types of annuities which function more like bank certificates of deposit, where you let the money earn interest and then convert the account into an income stream whenever you want.
Perhaps it would be best if you called our office at your convenience and we can review the different kind of annuities with you by phone. I promise there will be no sales talk and I'll give you honest answers to your questions.
Hersh
Delano
2016-02-09 13:47:33
We received Deferred Income Annuity quotes from your website and have a few questions.
1-Is the monthly amount locked in and is that how much we actually get each month for life?
2-Are there any additional fees at a later date?
Hersh Stern (ImmediateAnnuities.com)
2016-02-09 13:48:06
Hi Delano-
1- Yes, as long as the insurance company receives your application in good order and the premium or transfer forms before the quote expires, they guarantee the quoted rates.
2-There are no additional fees. The numbers you saw are literally the amounts you receive for your lifetime.
Hersh
Chrys
2016-02-16 14:33:46
Can I pay a varying monthly premium amount instead of a lump sum? Is there a calculator to determine the amount I need to invest each month over 18 years to create a $2000 monthly income in the future?
Hersh Stern (ImmediateAnnuities.com)
2016-02-16 14:38:13
Hi Chrys,
Most DIAs are "flexible premium" annuities, which means they allow you to add new premiums over time. These contracts require an initial premium amount of $10,000 - $20,000. After the initial premium is paid, much smaller amounts (as little as $500 each time) can be added.
While I can tell you the lump sum amount you need to pay today to generate $2000/month in the future I cannot tell you with certainty how much is required each month over the next 18 years to generate the same $2000/month. That's because the money you want to contribute each month will be credited at the time of deposit with the insurance company's then going rate. And that rate is not known today.
Hersh
Bill
2016-02-24 14:25:23
If I delay payment up to 1yr, is it still considered an immediate annuity if I get a "ratio" payout for taxes? If I delay the payout to begin in 5yrs, how does the tax work on that annuity? Thanks
Hersh Stern (ImmediateAnnuities.com)
2016-02-24 14:32:16
Hi Bill,
Hi Bill--
The tax treatment of your monthly checks is the same for an "immediate annuity" (where payments began within 12 months of purchase) or a "deferred income annuity" (which is like an immediate annuity but with an income start date that's delayed more than 12 months).
Your gains or interest is "amortized" per IRS tables along with the cost basis (the after-tax premium). This is called the "exclusion ratio" method for figuring the taxable portion of each payment and the insurance companies calculate these numbers for you.
In the quote spreadsheets you get at our web site we show you the taxable portion amounts for each company. These are the figures in the column titled "Taxable Portion." If you multiply these amounts by your tax bracket you'll have an estimate of your Federal income tax liability for each month's payment.
When you buy an annuity you'll receive a Form 1099-R from the insurance company each year. The gross taxable amount on your 1099 should match the amount shown on our spreadsheets.
Hersh
Joe
2018-10-29 12:25:53
My wife and I are retired and on a fixed income.
Q1. Is there a period of maturity (years) prior to beginning participation in the monthly payment?
Q2. Is there a minimum money required?
Fixed annuities seem to be the best way!
Hersh Stern (ImmediateAnnuities.com)
2018-10-29 12:33:19
Hi Joe,
The period of maturity for most insurance companies is a minimum of 1 month. I see that we sent you quotes for a Deferred Income Annuity and you chose to start your income two years in the future.
You don't have to wait to receive income. You could buy an immediate annuity which begins as early as 1 month after purchase. Your rates would be a bit lower because you would be younger when payments begin, and the insurance company would not have two years to grow your premium before making payments to you.
To answer your second question, our minimum premium is $30,000. Several insurance companies will allow for lesser premiums, but many require you get paid at least $100 each payment period to issue an annuity contract.
As you continue to review your quotes, feel free to contact me with any questions, I'm happy to help.
-Hersh
Linda
2019-05-02 10:38:38
If I buy a DIA with IRA funds, with payments to start in 2 years, do I have to take RMDs in the intermediate period?
Hersh Stern (ImmediateAnnuities.com)
2019-05-02 10:39:51
Hi Linda,
Since you are already over the age of 70 ½, you actually can't purchase a DIA and delay the payments for two years. You would only be able to purchase a QLAC, which limits your premium amount to 25% of your total Traditional IRA balance, or $130,000 - whichever is less.
You can read more about QLACs here:
https://www.immediateannuities.com/qlac-qualified-longevity-annuity-contract/
Also, you could certainly purchase an immediate annuity which would allow you to delay your payment as much as one year into the future.
-Hersh
Cher
2019-09-30 08:45:57
I am 35 years old. Can i rollover my entire 401k into an annuity now and not take out distributions until age 60?
Hersh Stern (ImmediateAnnuities.com)
2019-09-30 08:47:43
If you are still employed by the company you have this 401k through, then you will not be able to roll it over until you've separated from the company or reached age 59 ½. If this 401k is through a company that you no longer work for, then you should be able to roll it over into a deferred income annuity or a fixed indexed annuity, both which will allow you to begin taking payments at age 60.
Jake
2022-03-31 14:24:56
Hello,
When making additional contributions to a DIA, is there a limit to how much one can contribute in a year? Like how the IRS says you can contribute $6k to an IRA if you're less than 50 years old, or $7k if you're more than 50 years old. Do these same limits apply to a DIA?
Thanks
Kyle (ImmediateAnnuities.com)
2022-04-01 13:59:19
Hi Jake,
Thank you for your reaching out.
No, there is no limit on additional contributions into a DIA. You just cannot exceed the maximum premium amount that the particular insurance company will allow (usually this is $1 million - $2 million).
- Kyle
Gloria G.
2022-07-21 18:32:58
Realistically, what is the minimum amount of money must one have available to purchase an annuity?
Kyle
2022-07-22 08:46:42
Hi Gloria,
Thank you for reaching out!
This varies from company-to-company, but normally the minimum premium would be $20,000 - $30,000.
- Kyle
Steve
2023-09-12 10:16:25
I'm age 65 and looking at a $100k deferred annuity that starts paying at age 85 (20 years), with a cash refund option. If I die before age 85 (the SSA says there's a 61% chance of that), would the refund be $100k or a higher amount, based on how long my premium has been earning interest? Similarly, if I die after payments start, is the refund based on the original $100k premium or a higher amount?
Kyle
2023-09-13 16:27:11
Hi Steve,
Thank you for reaching out!
The "cash refund" provision will just return your original $100k premium in the event of your death before the income starts. If you pass away after income has begun, but before you've received back $100k, then the difference will be paid to your beneficiary in a lump sum.
Please let us know if you have any remaining questions. We'll be very happy to help.
Best regards,
Kyle