Deferred Income Annuity

The decline of pension plans is an unfortunate reality for today’s American worker. More than just an effective way to pool money for retirement, the pension enabled the “golden years” of financial security, world travels, and new hobbies. This ideal is harder to achieve with traditional IRAs or 401(k)s which help you save but don’t provide a good way to automatically turn those savings into dependable income, especially when you don’t know how long you’ll live.

There is a solution: a Deferred Income Annuity, or DIA. A DIA, known more casually as longevity insurance or a longevity annuity, is essentially a pension that you can buy for yourself. With a DIA, the wealth you’ve been accumulating – whether in your IRA, 401(k), or after-tax savings accounts – can be converted into a guaranteed lifetime paycheck starting at some point in the future.

Deferred Income Annuities (DIAs) are also known as longevity insurance and longevity annuities.

In this guide, we’ll tell you everything you need to know about DIAs – how they work, how they’re customized, and how to evaluate whether converting a portion of your assets into income makes sense for you.

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What is a DIA?

A Deferred Income Annuity (DIA) is guaranteed retirement income you can purchase to insure your longevity, or the risk of outliving your savings. When you buy a DIA, you commit money now in exchange for a future monthly paycheck continuing for as long as you’re alive. Whether purchased with your qualified or non-qualified savings, a DIA turns your assets into guaranteed income for life. You can think of it like a pension you buy for yourself.

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Breaking it down into its components:

A DIA is… an income annuity.

An income annuity is a contractual agreement between you and an insurance company. In exchange for a lump-sum premium, the insurance company promises to give you a steady, guaranteed paycheck for life (or a certain period of time, a less-common version of the product). The size of the paycheck is specified upfront and depends on factors such as your premium, age, and gender.

More specifically, a DIA is… a deferred income annuity.

A Deferred Income Annuity begins annuity payments at a future date, typically 2-40 years after the premium is paid. (In contrast, immediate income annuities begin payments within 1 year.) During the deferral period, the insurance company invests your money on your behalf. The longer you delay starting to receive payments, the greater the size of the payments they’ll be able to offer you.

And finally, a DIA can be… qualified, non-qualified, or a QLAC.

Qualified DIAs are purchased with pre-tax money from your 401(k), traditional IRA, or other qualified plan. The money is transferred penalty-free and will not incur any taxes during the deferral period. DIAs are subject to required minimum distributions (RMDs), meaning that income must begin by age 70½.

Non-qualified DIAs differ in that they are purchased with post-tax savings, are not subject to RMDs, and thus can be annuitized after age 70½. In addition, the taxes incurred once distributions begin will be lower to avoid taxing the money used to purchase the DIA twice.

QLACs fill the void left by qualified and non-qualified DIAs: the ability to use pre-tax qualified savings but begin distributions after age 70½. This type of DIA has the added benefit of deferring a portion of your RMDs until as late as age 85.

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With the introduction of the QLAC, it’s now possible to purchase a qualified DIA with income starting after age 70½ and as late as age 85. Learn more in our QLAC Guide.

In summary, a DIA is a pension you can buy for yourself using your pre- or post-tax retirement savings. In purchasing a DIA, you insure your financial security no matter how long you live.


History & Importance

The concept behind a Deferred Income Annuity, an exchange of a premium today for a stream of payments in the future, is not new. This is exactly the model upon which Social Security was built and exists today: the taxes you pay while working fund the Social Security income you’ll collect in retirement. A pension is another example of a DIA where the employer pays the premiums on your behalf.

A DIA is the only way for an individual to purchase a future stream of guaranteed income – like that offered by pensions and Social Security – by him or herself. The product was introduced more recently in response to employers’ shift from defined benefit (pensions) to defined contribution (401(k)) plans. This shift has meant that individuals are forced to do more retirement planning on their own. A 401(k) does a great job of helping you accumulate assets, but then what happens when you need to turn that pool of money you’ve accumulated into a steady stream of income you won’t outlive?

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That’s where DIAs come in. In exchange for a premium paid today, an insurance company will provide a guaranteed lifetime paycheck that continues for as long as you’re alive. Like the other types of insurance they offer, a DIA is a transfer of risk and a form of protection. Just like you insure your home, you can insure your longevity by passing on the risk that you outlive your savings to an insurance company.

It’s important to note that employers didn’t stop offering pensions because they’re not useful or financially responsible. It was simply too large of a liability for a company not specializing in insurance to manage. But today numerous insurance companies – and typically those with the highest credit ratings – offer DIAs.


Benefits

Figuring out how long your retirement savings needs to last is difficult. Guaranteed lifetime income can provide you with peace of mind through a paycheck that you won’t outlive. Buying a DIA with your retirement savings offers a number of benefits:

✓ Longevity Protection

Insurance is typically thought of as something you buy to protect you and your family from unfortunate events. By turning your assets into income you can’t outlive, the DIA offers a more pleasant kind of protection: longevity insurance. The longer you live, the more financial value the DIA provides.

✓ Finite Planning Horizon

Adding a longevity annuity to your portfolio can dramatically simplify your retirement planning. Knowing that at a future date you’ll have a paycheck that sustains your lifestyle allows you to manage your remaining assets to a fixed instead of unknown investment horizon. The certainty of guaranteed future income can completely change your approach to investing, withdrawing, and spending.

To illustrate how a DIA offers longevity protection and fixes your investment horizon, let’s use Alan as an example. Alan is 50-years-old and plans to retire at 70, at which point he’d like to have $87,000 to spend each year. But, without knowing how long he’ll live, Alan doesn’t know how much more he needs to save. He’s considering buying a DIA to simplify his retirement planning and to ensure his financial stability for as long as he’s alive.

With $100,000 of his savings, Alan can buy a DIA that will cover his annual expenses starting at age 85 and continuing for the rest of his life. Knowing that he’ll be set at age 85 regardless of his lifespan, Alan can more comfortably save for retirement. Assuming his IRA will earn a 5% return and ignoring inflation for simplicity, Alan needs to accumulate $950,000 by age 70. At that point, he’ll be able to retire and withdrawal $87,000 from his IRA every year until age 85 when his DIA income will kick in. His retirement portfolio is much more predictable and secure with the longevity insurance offered by a DIA. Note that for ease of explanation, this example is on a pre-tax basis.

Deferred Income Annuities Provide Guaranteed Lifetime Income
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DIA rates based on a $100,000 Lincoln Financial life-only policy for a male aged-50 with income starting at age 85. Rates as of 2/2/2017.

✓ Tax Preferential Treatment

From the government’s perspective, an annuity is a retirement savings vehicle. As such, it receives the same tax treatment as IRAs: no taxes are paid until distributions are made. For a DIA, this means that all the money you hand over to the insurance company can grow, albeit invisible to you, on a tax-deferred basis. The benefits are slightly different depending on whether the DIA is qualified or non-qualified:

  • Qualified DIAs are purchased with pre-tax funds from your 401(k) or traditional IRA, which are already accumulating on a tax-deferred basis. Retirement savings can be transferred to a DIA penalty-free, maintain their tax preferential treatment, and count towards your IRS-mandated required minimum distributions.
  • Non-qualified DIAs are purchased with post-tax funds that, depending on how they’re invested might incur income taxes annually. For your savings that are already earmarked for retirement but not sitting in a tax-deferred account, buying an annuity is a great way to postpone your taxes and allow your interest to compound.

✓ Spousal Benefits

A DIA can be set up as joint annuities, which means that payments continue as long as either you or your spouse are alive. Structuring the contract like this is a great way to preserve financial stability and quality of life for the surviving spouse.

Let’s continue to use Alan as our example. Alan expects that he will pass away before his 48-year-old wife, Claire. He wants to know that that she’ll be okay (at least financially) once he’s gone, so he’s considering adding her to his DIA. Alan can purchase a joint life policy that’s contingent on her life as well, such that income payments continue until both of them have passed away. The income payments will be lower, but they’re expected to be paid over a longer period of time. Since their expenses will decrease when it’s just Claire, they’ve opted for a 50% income reduction, which increases their income while they’re both alive.

Joint Life DIAs Provide Lifetime Income For Both Spouses
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DIA rates based on $100,000 Lincoln Financial single and joint life-only policies for a male aged-50 and a female aged-48 with income starting at age 85. Rates as of 2/2/2017.

✓ Principal Protection

The savings that you allocate to a DIA are protected from swings in the stock or bond markets. And, by selecting the return of premium & death benefit options (more on this later), you can guarantee that all of your savings will be passed onto your beneficiaries if you pass away prematurely.

✓ Some Liquidity

While DIAs are generally illiquid products functioning like a paycheck and not a savings account, many carriers offer some level of liquidity. Most commonly, this is in the form of commutation, or withdrawal benefit which permits accelerating upcoming monthly benefits. A limited number of monthly payments can be accelerated at once, and guidelines exist around when and how often the policyholder can take advantage of this liquidity.

✓ Clear Product Structure

The DIA has a simple structure. For any amount of premium you would like to put into the contract, the insurance company will tell you how much monthly income they can offer. There are some decisions you’ll have to make (more on this later) that affect the level of income, but that’s it. The income is net of the insurance company’s expenses and the commission collected by the distributor.


Drawbacks

Despite these benefits, the DIA is not good for everyone or for all situations. Here are some of the drawbacks:

✗ Limited Liquidity & No Cash Value

The DIA does not offer much liquidity and does not have a cash value that can be withdrawn or borrowed from. DIAs should be thought of as a future paycheck, like a pension. While the value of your money will be growing during the deferral period, its growth will only be reflected in the income amount and will be otherwise invisible to you.

✗ No Market Exposure

The income you’ll receive is determined upfront, fixed, and isolated from any market upside (or downside) potential. While this is a positive attribute for those focused on insurance coverage, it isn’t the solution for those seeking a more investment-style product.


Typical Buyers

A DIA is a powerful way to ensure you have a guaranteed source of income in retirement. That doesn’t mean it’s right for everyone, and it never makes sense to purchase an annuity with your entire portfolio. Here’s the methodology we’ve developed at Abaris to help you think about whether a DIA may (or may not) be a fit for you:

Consider buying a DIA if…

Social Security and/or pension benefits won’t cover your regular expenses
✓ You’re a pre-retiree or early in retirement
✓ You’ve accumulated between $250,000 and $5 million in retirement savings
✓ You have average or above-average health
✓ You’re seeking greater certainty in retirement and more of an insurance product
✓ You don’t need access to the money immediately

A DIA is probably not the right product for you if…

✗ Social Security and/or pension benefits cover your regular expenses
✗ You’re younger than 45 or over 75 years old
✗ You’ve accumulated less than $250,000 or more than $5 million in retirement savings
✗ You have below-average health
✗ You’re seeking higher risk and more of an investment product
✗ You need access to the money immediately

A common objection to DIAs is that they don’t build or provide access to cash value unlike other insurance products used for retirement planning. This is true, but the trade off is access to higher guaranteed income than these more liquid products will offer. Using only a portion of your portfolio to purchase a DIA leaves the rest of your assets to provide liquidity and market upside.

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If you’d like to assess your personal retirement finances in more detail, Abaris has developed an Advice Tool where we’ll help you project your retirement spending and analyze your preparedness.


DIA Rates

The income offered on DIAs will vary over time as market conditions change, being driven most notably by longer-term Treasury and investment grade corporate bond yields. In addition, your personal attributes (age, gender) and the policy options you select will impact the quote. Currently highly-rated carriers are offering the following DIA annual income payments for a $100,000 purchase.

DIA Quotes for March 2017

DIA quotes shown as annual income over initial premium as of 3/23/2017. All quotes are life only. Joint quotes for a male and female with the same age and 50% continuation.
Age Income Start Male Female Joint
55 65 $10,100 $9,500 $9,800
55 70 $14,700 $13,500 $14,100
55 75 $22,700 $20,300 $21,500
60 65 $8,200 $7,700 $7,900
60 70 $11,900 $11,100 $11,500
60 75 $18,500 $16,700 $17,500
65 70 $9,300 $8,700 $8,900
65 75 $14,800 $13,400 $14,000
65 80 $25,300 $21,700 $23,300
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Use Abaris’ Quote Tool to see how much guaranteed income your assets can buy today.

Understanding how your personal attributes and the options you select drive quotes enables you to structure the policy to best suit your needs. Expect to have to think about the following when evaluating a DIA:

Age

Income will decline as you age. The longer you wait to buy, the less time the insurance company will have to invest your premium before beginning income payments. Holding all else equal, buying income today will be cheaper than buying the same amount in the future.

Gender

Income will be higher for males than females. Because women have longer life expectancies than men, the income they can receive each year will be smaller.

Premium

Income will increase with higher premiums. A portion of the insurance company’s expenses incurred are fixed per contract such that incremental premium can go entirely towards buying income. Said another way, there is a discount for larger premium deposits.

Income Start Date

Income will increase the longer you delay its start. Longer deferral periods mean (1) more time for the insurance company to invest your money before starting payments and (2) fewer years of expected income payments.

Single vs. Joint Life

Income will be higher for single life than joint life policies. A joint life policy will provide income as long as either person is alive, which is almost certainly longer than if contingent on one person.

Payout Option

Income will be lower for richer guarantees. Guaranteeing a minimum cumulative income (cash refund / installment refund) or a minimum number of payments (period certain) increases the amount the insurer expects to pay you. To compensate for the extra guarantee, they will need to lower the recurring payments.

Riders

Income will be lower for each rider added. In general, any extra options or riders added to a policy will require compensating the insurer for additional risk they’ve assumed. Typically these options increase your guarantee or provide you with extra protection, both of which will result in lower base income amounts.

Finally, you’ll usually notice an inverse relationship between the creditworthiness of an insurer and the income they offer. Insurers with higher credit ratings have earned them by maintaining higher capital reserves and more conservative investment portfolios limiting their profitability and thus the income they can offer you. Only highly-rated insurers (A.M. Best rating of at least A) make the cut for inclusion on the Abaris platform. And, even among the insurers we’ve decided to work with, it’s worth distinguishing among the levels of financial strength. The guaranteed income you’re promised is only as good as the financial strength and longevity of the insurer backing it.


Financial Value

A common question asked when considering moving some of your retirement assets into a DIA is: what value will I get from this purchase? Typically, pre-retirees look for a quantitative answer, such as an IRR or ROI, that they can compare to returns generated in their fixed income portfolio.

Unfortunately, the value of a DIA cannot be understood quite so simply or compared to the return of a traditional financial product on an apples-to-apples basis. Why not? Because calculating an IRR or ROI requires knowing the upfront investment and all future income amounts and dates. As a longevity insurance product, the DIA will provide you with income for as long as you’re alive, i.e. end date to be determined!

Instead, we can calculate a range of IRRs based on your potential lifespan. The longer you live, the higher the IRR over the life of the product will be. While thinking about your quantitative return should be a part of your analysis, don’t forget about the more qualitative risk reduction and peace of mind the product is providing as well.

In one of our earlier examples, 50-year-old Alan bought a $100,000 DIA with income starting at age 85. The policy could wind up generating a 4.5% return if he lives until 90, which increases to 5.9% at age 95 and 6.5% at age 100.

DIA Return Increases The Longer One Lives
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DIA rates based on a $100,000 Lincoln Financial life-only policy for a male aged-50 with income starting at age 85. Rates as of 2/2/2017.

Remember, a DIA is insurance. Its purpose is to protect your longevity via guaranteed lifetime income!


Taxation

The taxation of annuities depends first and foremost on whether the annuity was purchased with pre-tax or post-tax money. If the premium was paid with post-tax money, as with a non-qualified annuity, the portion of any income payments that constitutes a return of that premium will not be taxable. On the other hand, qualified annuities are purchased with pre-tax retirement savings. Because the money used to fund the annuity has never been taxed, all distributions from the annuity will be fully taxable. In either case, ordinary income tax rates will apply.

Taxation of Qualified DIAs

At purchase, pre-tax funds will be moved from one type of qualified retirement account to another. Traditional IRAs, 401(k)s, and qualified DIAs all have the same tax-deferred status, so moving money among them will not incur any taxes or penalties.

No taxes will be owed during the deferral period. DIAs do not have an account value that accumulates, so there isn’t actually anything to tax. In fact, even if it had an account value that accrued interest (a fixed deferred annuity) or earned capital gains (a variable deferred annuity), no taxes would be due. As retirement savings vehicles, annuities can grow on a tax-deferred basis.

Once the DIA is annuitized, i.e. income payments begin, taxes will be owed. Because the money used to purchase a qualified DIA has never been taxed, all distributions will be 100% taxed as ordinary income. These taxable distributions will be reported to you and the IRS by your insurance company using tax form 1099-R.

For DIAs with return of premium and/or death benefit riders, beneficiaries will receive any remaining value in the contract in the case of the annuitant’s premature death, amounting to the difference between the initial premium paid and the cumulative income payments received. Any death benefit owed will be paid directly to the beneficiary, thereby avoiding the probate process. The beneficiary can elect to annuitize the death benefit over his/her life expectancy instead of taking it as a lump sum. Either way, the annuity contract will typically be included in the deceased’s estate, and the beneficiary will be taxed on any proceeds they receive at ordinary income tax rates. Note that designating your spouse as your beneficiary will typically result in the annuity being excluded from your estate.

Taxation of Non-Qualified DIAs

Non-qualified DIAs are purchased with savings that have already been taxed. If those savings are currently earning interest that is taxable annually, with a Certificate of Deposit for example, moving that money into a retirement savings vehicle can reduce your income taxes during the deferral period. Technically, even though annuities provide for tax-deferred accumulation, DIAs are not accumulation annuities, so there isn’t actually anything to tax during the deferral period.

Once the DIA is annuitized, i.e. income payments begin, taxes will be owed. Each income payment can be split into two pieces: a part that’s returning your initial investment, and a part that’s your gain or interest earned. Taxes will only be owed on the gain, as the premium you invested in the contract has already been taxed. This non-taxable portion of the income payment is determined using an exclusion ratio, which is provided by the insurance company at purchase.

Exclusion Ratio = Investment in the Contract ÷ Expected Return

The exclusion ratio will be applied to each income payment, indicating how much is not taxable, until the full investment in the contract has paid out. Once the investment has been fully returned subsequent income payments will be fully taxable.

To see how this works, let’s continue analyzing Alan’s $100,000 DIA that he’s buying at age 50 with income starting at age 85. Alan will not be using pre-tax retirement savings to buy the DIA, so it’ll be classified as non-qualified. Once Alan starts receiving income at age 85, he’ll have to pay taxes on a portion of the payments.

The exclusion ratio for Alan’s policy is 17%. The insurance company calculated this as the ratio between his investment in the contract ($100,000) and the total amount of income they expect to pay him ($599,000 in this case). Thus 17% of his income payments will be excluded from his taxable income until a total of $100,000 has been excluded. For Alan, this will be the case once he’s received 7 years worth of payments, after which the DIA income will be fully taxable at ordinary income rates.

Non-Qualified DIA Income Payments Are Not Fully Taxable
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DIA rates based on a $100,000 Lincoln Financial life-only policy for a male aged-50 with income starting at age 85. Rates as of 2/2/2017.

Finally, if a death benefit is due to your beneficiaries, taxes owed will be calculated in a similar manner. Any portion of the death benefit that constitutes a return of premium will be received tax-free, whereas benefits in excess of the initial investment will be taxed at ordinary income levels. Either way, the benefit will be passed directly to beneficiaries, thus avoiding the probate process. And, unless your spouse is designated as your beneficiary, the annuity will typically be included in your estate.

The tax treatment of qualified vs. non-qualified DIAs is summarized in the following table. However, you should consult a tax professional for complete information regarding annuity taxation as it applies to your personal situation.

Annuity Phase Qualified Non-Qualified
Purchase No taxes or penalties incurred when moving pre-tax retirement savings to a qualified DIA. No taxes or penalties incurred when moving post-tax savings to a non-qualified DIA.
Deferral No taxes will be owed during the deferral period. No taxes will be owed during the deferral period.
Annuitization Income payments will be fully taxable at ordinary income tax rates. The portion of income payments that constitute a return of investment, as determined by the exclusion ratio, are not taxable.
Death Benefit
(if applicable)
The beneficiary will be taxed on any proceeds they receive at ordinary income tax rates. The beneficiary will be taxed only on the portion of proceeds that exceeds a return on investment at ordinary income tax rates.

Diversification

It is widely accepted that a diversified portfolio is superior to one with singular or uniform market exposure. For nearly every target rate of return, a diversified portfolio of minimally-correlated investments can be constructed that will be lower risk than one investment with equal expected return. When diversifying your retirement portfolio, you will likely select a combination of equity and bond market investments that are appropriate for both your risk-appetite and your investment horizon. In general, your portfolio should tend towards equity investments in the early years and then gravitate more towards fixed income investments as you near retirement.

The fixed income assets in your portfolio serve to provide steady, reliable income that is uncorrelated, or inversely correlated, with the equity markets. Sound familiar? This is exactly the purpose that a DIA or any income annuity serves, with one major added benefit: the annuity will continue to make payments until you die. Allocating a portion of your fixed income portfolio to a DIA can generate comparable returns (see the Financial Value section) and reduce your longevity risk.

In fact, adding the security of a DIA to your portfolio can enable you to earn a higher rate of return with the rest of your portfolio. If your DIA or other annuities generate enough income to cover your retirement expenses, you have even more flexibility to invest the equity portion of your portfolio without putting your livelihood at risk.

One final benefit of owning a DIA is the ability to invest and manage the rest of your portfolio to a fixed time horizon. That is, you’ll know exactly what type of income your portfolio needs to generate and for how long if the DIA will be covering your expenses starting at a known point in the future.


Features & Riders

It’s best to think of the base DIA product as that which provides the most income based on your premium, age, gender, and income start date. But, there’s room to customize the product or add additional guarantees to meet your needs. In some cases, the insurance company will refer to these options as product features. Other times they’ll be listed as riders.

Below are the various ways you can customize your policy, noting that these options can vary from insurer to insurer:

Single vs. Joint Life

DIA income can be tied to a single or joint life:

  • Single: income paid over the lifetime of the insured
  • Joint: income paid over the ‘joint life‘ of two insureds, i.e. as long as one or both are alive

The income level following the loss of the first life can be designed to remain level or decrease. Opting to reduce the income upon the passing of the first spouse (typically to 40-99% of the starting income level) allows for a greater income level while both are alive.

An alternative to buying a joint life annuity is to purchase a single life annuity with a death benefit and designate your spouse as the beneficiary. Upon your passing, he/she will have the option to continue the contract in his/her name until the benefit has been paid out.

Payout Options

Income can be based purely on lifespan or can have a guaranteed component:

  • Life Only: payments stop at death (or later of two deaths for joint)
  • Life with Cash Refund: additional guarantee over life only that pays beneficiaries the difference between the premium and sum of all payments already received upon insured’s death
  • Life with Period Certain: additional guarantee over life only that guarantees payments for at least a certain number of years. Payments will continue to beneficiaries if insured passes away during this period of time

Payout Frequency

Income payments can be made monthly, quarterly, semi-annually, or annually.

Inflation Protection

Most insurance carriers offer an inflation adjustment or annual increase rider that will adjust the DIA income payments annually for inflation. The adjustment made could be predetermined (between 1-5%) or in some cases be based on a Consumer Price Index. Providing these increases will require a lower starting income. Note that the inflation rider does not cover the deferral period, instead only going into effect once the income stream begins.

To illustrate, let’s continue with Alan, our 50-year-old who wants to purchase a $100,000 DIA with income starting at age 85. His initial quote excluded inflation protection and got him $7,250 per month ($87,000 per year). If he’d like his income payments to keep pace with inflation, estimating it to be 1% per year, he’ll have to accept a lower initial income of $6,910 per month ($82,900 per year) which will increase over time.

DIAs Offer Inflation Protection Riders
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DIA rates based on $100,000 Lincoln Financial life-only policies with and without a 1% increase rider for a male aged-50 with income starting at age 85. Rates as of 2/2/2017.

Because inflation affects the purchasing power of money, it presents a challenge for retirement, which could last 40 years. While we’re currently experiencing a period of low inflation, it’s averaged 3.2% over the past century, meaning that prices have almost doubled every 20 years.

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Income Annuity Inflation Riders

Does buying an income annuity with an inflation rider make sense? And if so, what kind of rider is best? The short answer — inflation is a significant risk, but you're probably better able to protect against it with other assets in your portfolio than you are with an inflation rider on your income annuity.


Read full blog post

Adding an inflation rider to your DIA is one way to mitigate the risk of declining purchase power, but it’s probably not the most efficient way as the extra protection will come at a cost. Consider instead more direct ways to earn inflation-adjusted dollars. Your Social Security benefit, for one, will be indexed for inflation through a Cost of Living Adjustment. And, for the rest of your assets, maintaining exposure to equity markets and investing in inflation-linked bonds, such as TIPS or I-Bonds, can provide an effective hedge.

Principal Protection

Through return of premium and death benefit riders, you are guaranteed that your principal (premium paid into the contract) will be returned to your beneficiary should you pass away before getting it back through income payments. The return of premium option protects you before the income start date, and the death benefit rider protects you thereafter. Terminology varies from carrier to carrier, but we simplify it and always line up quotes apples-to-apples on our platform.

For example, if our 50-year-old pre-retiree Alan is worried about losing money in the event of prematurely passing away, he can add the return of premium and death benefit riders to his DIA. His $100,000 DIA policy will offer a lower monthly income to cover the cost of the richer guarantee, but any unrecognized value in the contract will be passed onto his heirs. Should Alan pass away before income payments begin, his $100,000 premium will be returned to his beneficiaries. If he passes away after income payments have begun but before those payments are cumulatively $100,000, his beneficiaries will receive $100,000 less the total income payments made.

DIA Return of Premium & Death Benefit Riders Offer Principal Protection
dia-guide-deferred-income-annuities-principal-protection-cash-refund-return-of-premium-death-benefit-riders
DIA rates based on $100,000 Lincoln Financial life-only policies with and without return of premium and death benefit riders for a male aged-50 with income starting at age 85. Rates as of 2/2/2017.

Additional Premium Payments (Flexible or Subscription)

With some carriers you have the ability to fund your DIA over time, either through a flexible premium option or on a subscription basis. This is a good approach for those betting on pricing improvements or wanting to contribute a percentage of your income over time.

Income Start Date Flexibility

Some insurers’ products allow you to change your income start date after purchasing the annuity, sometimes even more than once. Keep in mind that changing your income start date will affect your payments (increasing them if the start date is pushed back and vice versa).

Payment Acceleration

While DIAs are generally illiquid products, functioning like a paycheck and not a savings account, many carriers offer some level of liquidity. Most commonly, this is in the form of commutation, or withdrawal benefit which permits accelerating upcoming monthly benefits. A limited number of monthly payments can be accelerated at once, and guidelines exist around when and how often the policyholder can take advantage of this liquidity.


Buying Tips

Buying a DIA is a long-term commitment, so dedicate enough time and attention to doing it right! In addition to being available to help walk you through the process, Abaris has compiled a list of things to keep in mind:

Available Carriers

Longevity annuities are offered by leading insurance companies, including Guardian Life, Lincoln Financial, MassMutual, MetLife, Mutual of Omaha, New York Life, Pacific Life, and Principal. Before you buy, you’ll want to compare quotes and product features – and remember, not all companies sell all products in all states.

Where To Buy A DIA

DIAs are sold via insurance agents, brokers, and financial advisors. It’s also possible to shop for a DIA online via our website. We limit our product offerings to only those sold by top-rated insurers (A.M. Best rating of at least A), and our Quote Tool allows you to easily compare quotes side-by-side.

Consider Your Agent/Broker's Incentives

The Department of Labor has been working for nearly a decade to reform the requirements of financial advice for retirement. The goal is to ensure that advisors, agents, and brokers put their clients’ best interests before their own. Regardless of whether the reforms are implemented, make sure you consider your agent or broker’s incentives. How are they compensated on the sale? How do they select the products they’re showing you? Do they work with only one or a handful of insurance companies? Are they acting in your best interest?

Compare Quotes Apples-to-Apples

Some financial products are too unique to be compared to one another, but this isn’t the case with DIAs. You should be able to see quotes from different carriers that are exactly the same in all major respects except two: price and credit rating.

Credit Ratings Matter

It can be enticing to just go with the company that offers the highest payout, but be careful. The value of a DIA is undeniably linked to the claims-paying ability of the insurance company. The insurer needs to be around at least as long as you are! Buying from only highly-rated insurers is the way to go.

Consider Buying In Chunks Or As A Subscription Over Time

If you’re still years away from retirement, are optimistic about pricing improving, and/or would like to diversify across carriers, you can buy DIAs in pieces over time. Keep in mind that, all else being equal, waiting to buy will reduce the amount of income the insurance company can offer. In addition, the pricing usually isn’t quite as good at smaller purchase sizes.

Understand The Difference Between Qualified & Non-Qualified

The decision to buy a qualified vs a non-qualified DIA is most likely driven by where your retirement savings are currently located: in a pre-tax IRA or 401(k), or in the form of after-tax savings. If you use pre-tax savings to purchase a DIA, it will be qualified. Otherwise, the DIA will be non-qualified. Like 401(k)s and IRAs, qualified DIAs are governed by Section 408 of the tax code and are subject to the same required minimum distributions beginning at age 70½. On the other hand, non-qualified DIAs are not subject to RMDs and thus can have an income start date later than 70½.