Deferred Income Annuities, also known as Longevity Insurance Guarantees and Lifetime Income Guarantee Contracts, have several acronyms- DIA’s, LIG, or just Longevity Insurance. They are an exciting evolution of the most traditional form of annuity, the Immediate Annuity.
With a Single Premium Immediate Annuity, or SPIA, you buy lifetime income that starts immediately, and generally do so with the payment of a single premium amount. These types of annuities are explored in the Immediate Annuity Pages
By contrast, a Deferred Income Annuity offers all the benefits of longevity protection and lifetime income, but it does it in a more efficient way by deferring the start date of the income stream.
I’ve long been a fan of Deferred Income Annuities- you can see my previous thoughts here:
Longevity Insurance, a Perfect Retirement Backstop, plus Longevity Insurance In The News, a follow-up, Semi-Longevity Insurance, and new rules on 401K’s and Annuities.
Why Deferred Income Annuities Are So Effective
A Deferred Income Annuity offers a high lifetime income payout starting at a later date. Generally buyers are in their late 40’s to mid 60’s in age, and are buying income to commence payouts at age 80, 85, or 90 years of age. It varies between carriers and you can select what works best for you.
By deferring the start of the income stream, a DIA gives superb longevity insurance simply because it offers you, the buyer, the highest payout of Mortality Credits. If you have great health or family history of a long life, you can get the biggest bang for your buck by waiting to take income.
A few of the main benefits of Deferred Income Annuities are:
- Build safety around your entire portfolio by eliminating the risk of outliving your money.
- Plan effectively with the rest of your assets when the single biggest unknown is solved.
- Cream off the best of the best that the Insurance Company can offer- Mortality Credits.
- In a low rate world, your payout on a Deferred Income Annuity can be tremendous.
Deferred Income Annuity Pros and Cons
The primary benefit from a Deferred Income Annuity is a high, guaranteed, lifetime payout.
Quite simply, annuitization of assets- meaning, turning your assets into the maximum possible spendable lifetime income at the lowest risk- is mathematically proven to be only possible by using income annuities. And a deferred income annuity skims off the absolute best a carrier has to offer.
The major disadvantage of a pure longevity income insurance policy is that when you pass away, any unrecovered principal is surrendered to the insurance company. Now, there are ways to structure the contract to continue payments in your absence, see the Product Detail Report for more.
DIA Payout Rates And Rate Of Return
Most people are conditioned to look for a rate of return, such as a 5% rate on a mortgage, or a 10% rate on a credit card. It’s easy to compare investments of similar risk profiles by their rate of return.
However, this is impossible to determine with a Lifetime Annuity of any type unless you know the exact day you will die. Only a complete investment and finalized income stream can be calculated into a rate of return.
For example, if your father had an Immediate Annuity he bought for $100,000 in 1970 that paid $12,000 per year until he died in 1990, we can calculate the rate of return. (Exactly 240 monthly payments of $1000 that started a month after purchase, bought for $100,000, is precisely an of 11.04688% Effective Rate of Return, or IRR)
But how do you know the rate of return on a Deferred Income Annuity you are considering now? You can’t, unless you know the date of your last check.
Instead, your Deferred Income Annuity will show a Payout Rate, and you will have to estimate the Rate of Return based on your personal life expectancy.
What A Payout Rate Shows
A Payout Rate is quite simple- lets use the example above. The $100,000 investment paid out $12,000 per year. That’s a 12% payout rate.
The primary factors that determine the payout rate for Deferred Income Annuities are age and gender, and your state of residence will also be required as not all carriers offer all their products in all states. In the case of Joint Life annuities, there may be two genders and two ages to factor in.
For example, a recent quote for a single male aged 63 from California with $100,000 to invest would receive $5,546.06 per month starting at aged 85, or a 65.5% Payout Rate.
A 63 year old California female with the same $100,000 premium would receive $5484.89 per month starting at her age 85, a 55% payout rate. Her longer life expectancy results in lower payout rate.
Now, these same individuals as a couple would receive a joint life benefit of $3137.24 per month for life, starting on the younger’s 85th birthday. This is a lower 37.64% payout rate. Joint life annuities have lower payout rates than either of the individuals on their own could get because of the longer life expectancy of couples.
Couples with a wide disparity of age will find Deferred Income Annuities to offer even lower payout rates, because the rate is determined by the youngest of the two, and receives a further lowering due to the joint life. It usually makes more sense to insure each life individually.
You can explore your own payout rates by giving us a call to generate single, joint, or other Deferred Income Annuity quotes for you.