Deferred Income Annuity
A deferred income annuity is a contract funded with a lump-sum payment (premium) in exchange for guaranteed income payments at a future date. Also known as a longevity annuity because of QLAC-eligibility, a DIA can serve as a pension-like income stream for investors without a defined benefit plan through their employer. A DIA helps bridge an income gap and maintains an income floor to cover basic expenses in retirement.
Deferred Income Annuity sales increased totaled $1.9B, a 14% increase from 2020, but less than 2019's $2.5B total sales. For clients seeking deferred income without the market exposure of a variable annuity, a DIA provides a more predictable solution.
These measures are created within the context of insurance products.
How They Work
Upon purchase, a client’s initial premium is exchanged for guaranteed income at a later date, in some cases up to 40 years later. Because of the tradeoff between current assets and future income, the payout received with a DIA is substantially higher than a SPIA. Some carriers allow for additional contributions, in contrast to the single premium construct of a SPIA.
DIAs can be highly customized to provide income payments monthly, quarterly, or yearly for the annuitant’s life or a defined period depending on the payout options available with the annuity. DIA payout rates are determined by the insurance company and are based upon the life expectancy of the annuitant at time of purchase. Once payments begin, they will continue at a fixed rate until the end of the specified payout period or annuitant’s life.
Because clients are living much longer in retirement, some DIAs offer increasing payout options to protect purchasing power typically lost to inflation. Choosing this option can increase annual payouts by a compounded interest rate of 1%-5% but will reduce initial income payments. DIAs are also eligible for QLAC treatment, meaning that under 2020 contribution limits, RMDs up to the lesser of $135,000 or 25% of client qualified assets 3 can be delayed until age 85. Upon purchase, a client’s initial premium is exchanged for guaranteed income at a later date, in some cases up to 40 years later.
Problems with Commissioned DIAs
In a commissioned DIA sale, the compensation paid to the agent results in a reduction of the premium applied to the contract.
In a Commission-Free situation, the full amount of the premium is applied to the contract, resulting in more growth for higher income payments when annuitized.
How to Think About Commission-Free DIAs
When your client needs:
GUARANTEED LIFETIME INCOME: DIAs are explicitly designed to manage longevity risk by generating an income stream that clients cannot outlive.
FIXED INCOME: With interest rates at historic lows, DIAs can provide a higher rate of consistent income payments than a fixed income strategy.
TAX MANAGEMENT: QLACs can help control RMDs for tax sensitive clients.
The purchase of an annuity within a retirement plan that already provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefits. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to recommending the purchase of an annuity within a tax-qualified retirement plan. In addition to surrender charges, withdrawals are subject to income tax.
Withdrawals prior to age 59 1/2 may also be subject to a 10% federal tax penalty.
Have more questions about the Deferred Income Annuity?
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