Deferred Income Annuity Definition

Today, we are discussing Deferred Income Annuities. What's the definition of a Deferred Income Annuity? Some people call them longevity annuities because they solve for longevity risk. What longevity risk really means is not outliving your money, and that's what a Deferred Income Annuity does. So, we will talk about how it fits, the benefits, the limitations, how it started, and the fact that the Single Premium Immediate Annuity and the Deferred Income Annuity are cousins. We'll talk about how to quote it, structure it, and all that fun stuff. In the end, I'll tell you how to get the Deferred Income Annuity owner's manual, which explains it in detail. It's about 50 pages long, and you can get it for free.

‌What Do They Solve For?

‌DIAs, Deferred Income Annuities, and let's call them DIAs from here on in, so I don't have to say Deferred Income Annuity all the time. So, what do DIAs solve for? They're future pension plans. You can choose the date in the future you want to turn on the income stream, and you can structure it for your life, you and a spouse's life, or you and someone else's life. It doesn't have to be a spouse or partner. And that income stream is based on your life expectancy. This is very important, so listen. Life expectancy at the time you take the payments. Now, interest rates do play a role because all annuity income, regardless of type, is a combination of return of principal plus interest. So, the benefits of these types of annuities, longevity annuities, and DIAs are that they're very simple and easy to understand. They are pure transfer of risks with no moving parts and no annual fees.

‌Commissions

‌As with all commissions, with annuities, commissions are built into the product. You never see them, but they're low with Deferred Income Annuities because they are simple, and you can attach Cost of Living Adjustment increases or CPIU increases. Most are just Cost of Living Adjustment increases that increase the income stream every year. But understand, put your thinking cap on. Annuity companies have the big buildings for a reason. They do not give that away. If you attach a COLA, Cost of Living Adjustment, an increase to the policy, and the income stream, they will just lower the payment.

‌Limitations

‌Limitations on a Deferred Income Annuity, it's a rigid contract. Once you turn on the income stream, you can't get a lump sum back. People don't like that there's no trackable interest rate on the growth part. There's no growth part of a Deferred Income Annuity. The longer you allow the annuity company to hold onto the money, the more they will pay you. But a lot of people like to see trackable growth. If that's it, then DIAs are not for you. That's the limitation.

‌Structuring

‌Structuring a DIA, you can use it inside of an IRA up to age 70. You can use it outside of an IRA with no age of limitations. Actually, past 70 in an IRA is called a QLAC. And then you can also use it in a Roth IRA. If you do it in a Roth IRA, the income stream is tax-free. But understand that the key component of a DIA is that pricing is based on your life expectancy or life expectancies at the time you take the payment. Interest rates play a secondary role. So, there's no way to time interest rates. I wish there were, but there's not. However, the value proposition you need to decide on is that you cannot outlive the income stream. There's no ROI or return on investment until you die. Look at it as a pension. Now, you can also change the income start date with most structuring of DIAs after the policy is issued. When you go into the policy on the application, you'll say, "Okay, this is the date I want the income stream to turn on." But say, for instance, a life with cash refund or life with installment refund, you can change that start date once after the policy is issued. But again, the payments are based on life expectancy. The younger you are, the lower the payment. The older you are, the higher the payments. Sounds similar? Yeah, Social Security works the same way. That's, in essence, the good and the bad of DIAs.

‌DIA Quotes

‌Okay, so structuring the quote, there are numerous choices. Most people say with annuity quotes, they had this thing in their head that when they die, the money goes poof, and the evil annuity company keeps the money. That's only one of about 30 ways to structure it. That's called life only or joint life only. This means when your Learjet hits the Utah mountains and goes poof, the money goes poof with you. But you don't have to do that. You can structure it so that any unused money goes back to your list of beneficiaries. You can do a joint life with an installment refund, joint life with a cash refund, or joint life with a certain period. What you have to do is tell me exactly how you want the money to work, and we'll structure it that way. So, if you say, "I don't give a rip about my kids; I just want the highest payment," okay, that's life only or joint life only. Or if you love your kids and want to make sure they get the money, that's great, too.

‌Client Example

‌Great story on that one. A guy called me the other day, and we saw a lot of Deferred Income Annuities. I love the simple products because you own annuities for what they will do, not what they might do. And so, we're all about contractual guarantees, and this guy's like, "I need a lifetime income stream for me and the wife using non-IRA money." I said, "Fine, that's great because the return of principal plus interest is the way the payments are coming, and you don't have to pay taxes on the return of the principal part, so you're getting a little more bang for your buck." But he said, "Yeah, but I want to make sure that any unused money, if me and the Mrs. die in some fiery plane crash, I want the money to go to the kids." There's one thing, though, about that. He goes, "I don't want them to get the lump sum. Can you structure it so they can't get the lump sum?" Now, if you wanted to give them the lump sum, it's joint life with cash refund, meaning that the lump sum goes to the beneficiaries in a lump sum, whatever's left. But he wanted to handcuff the beneficiaries. And that's a loving gesture for all those kids out there who are wondering ambiguities. They just haven't got it together yet. But if you're upset about them, I want you to remember what you were like when you were 20 and 22 and 25 or whatever. Now, if you're out there going, "Hey, my kid's 45, and he's still in the basement." That's your problem. That's not my problem. But the point is he wanted to handcuff the beneficiaries so they would get the payments of the remaining amount.

‌That's joint life with installment refund. And we set that up that way. So, it guarantees that he will get a lifetime income stream. He and his wife are going to get both lifetime income streams regardless of how long either one of them lives. However, when one dies, the income stream continues uninterrupted and remains unchanged for the second spouse's life. And then when the second spouse dies, whatever's left in the account goes in payment form, the same payment level to the beneficiaries, and we can split it up. If you've got three kids, you split it into a third, third, and third. Or two kids, half and half. However, you want to do that. And by the way, you can change the beneficiaries if you want to. If your kids piss you off, you can take them off. So, that can be revoked.

‌You can structure it however you want to structure it. Just be brutally honest with me. Brutal annuity truth, brutally honest with me. And we'll structure it exactly how you want it to be structured. Now, to get a quote, go to The Annuity Man. You can fill out the income later quote, and we will quote that for you and send you the PDF quoting all carriers. People always say, Stan, what's your favorite Deferred Income Annuity, longevity annuity? I don't have one. I guess it's the highest contractual guarantee for your specific situation. I don't know who that company is. We represent everybody. Once we send you the quotes and the PDF, we can discuss Claims Paying Ability, ratings, Comdex rankings, etc., so you'll feel comfortable with that lifetime income guarantee.

‌Where Do They Fit?

‌So where do longevity annuities, DIAs, fit in your portfolios? For income later. It's to fill in that gap of income floor that you need. You can also use it to hedge against inflation with income starting at a later date. Now, to get a quote, and we talked about the customization of the quotes, but you can quote it two different ways. You can say, "Hey, Stan, I have X amount of money, a lump sum, and I want to see how much income that will produce at this specific time that I want to turn on the income stream." Or you can say, "Hey, Stan, eight years from now, I need $3,000 a month for the rest of my life and my wife's life to fill in an income gap." We can reverse engineer the quote to find out how much premium is needed to guarantee that $3,000 a month. Obviously, we will choose the carrier that offers the lowest premium required to guarantee that specific monthly amount. Annuities are customizable.

‌They're also commodities. It's like buying a plane ticket. We quote all carriers, and the quotes last seven to 10 days, like a gallon of milk. Unless you move forward, lock in the quote, and get the paperwork rolling, we'll keep quoting them for you. There's no obligation on your part.

‌You've learned a lot today about DIAs. I want to get you my Deferred Income Annuity, longevity annuity owner's manual. It's easy to understand, and once you read it, you'll get it. Then you get some quotes, you'll understand how it all works. Don't try to time rates. Remember, it's based on life expectancy at the time you take the payment. Rates play a very secondary role.

‌Now, getting the book is very, very simple. Click on this link, and you can download all my annuity owner's manuals, including the DIA book we discussed. If you have any questions, go to The Annuity Man and ask me a question. If you want me to do a video on a specific topic, we can do that as well. Thanks for joining me today. See you next time.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.