What is a Deferred Income Annuity?

John Darer • December 8, 2019

Why Buy a  Deferred Income Annuity?

longevity risk

A Deferred Income Annuity helps to address longevity risk over a fixed period or the lifetimes of one or more individuals. A DIA is sometimes known as a guaranteed future income annuity, or secured future income annuity. 


How Does a

Deferred Income Annuity Work?


You can buy a  deferred income annuity today with a lump sum payment, or you can contribute flexible premium payments over time to build a stream of guaranteed lifetime income that starts in the future, when you need it to, at a pre-determined future date. So you could buy a DIA now and have income start in 5 years, 10 years, and so on, or at a specific age when you want annuity payments to begin.


Benefits of Deferred Income Annuities

 

  • Predictable pension like income stream to help ease concerns about running out of income
  • Stability. Deffred income annuities are Issued by well capitalized regulated life insurance companies
  • Can be used as a back stop or insurance to an investment plan.
  • Tax deferred interest until a time when you may be in a lower tax bracket
  • Simplicity. You know now what you will get then for any amount of investment.

 

What Are Some of the Life Insurance Companies That Issue Deferred Income Annuities ?

 

  • New York Life Insurance Company
  • MassMutual
  • Guardian
  • Pacific Life Insurance Company
  • Pacific Life and Annuity Company (in New York)
  • Principal Life Insurance Company
  • Western & Southern

 

Is There a Minimum Deferral Period With a DIA?


The minimum deferral period varies from 13 months to 2 years depending on the life insurance company that issues the DIA.


Is There a Maximum Deferral Period With a DIA?


The maximum deferral period varies by the life insurance company issuing the DIA and source of funds, but it generally ranges from 13 months to 40 years. The longer you defer the higher your benefit when payments begin.


What is the Maximum Issue Age for a DIA?


Ages 68-69, depending on issuing company for qualified funds. Ages 80-83 for a QLAC and ages 80-93 for non qualified depending on insurance company


Is there a limit of investment in a Deferred Income Annuity?


Typically the minimum is $10,000. But may vary by company.


Can a Deferred Income Annuity be used as a Qualified Longevity Annuity Contract?


A Qualified Longevity Annuity Contract (QLAC) allows income to begin past the required minimum distribution (RMD) age of 70 ½ for qualified retirement plans. They are subject to premium limitations. A Deferred  income Annuity can be used as a QLAC.


How is Income From A Deferred Income Annuity Taxed?


Income is taxed depending on the source of funds


 

  • Distribution from non-qualified deferred income annuities purchased with after tax dollars are, in some part, considered a return of previously taxed principal and therefore excluded from taxation. The amount excluded from taxes is calculated by an Exclusion Ratio, which often appears on annuity quotation sheets. Non-qualified annuities may be purchased by individuals investing their after-tax 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, or by employers. 
  • When the distribution from a deferred income annuity is from an account funded with qualified money  (i.e. not previously taxed) , the entire payment received each payment period is taxable as income at ordinary income rates.  Qualified deferred income annuities may be sourced from employer-sponsored pension plans (such as Defined Benefit or Defined Contribution Plans), lump sum distributions from such retirement plans, or from such individual retirement accounts such as as IRAs, SEPs, and Section 403(b) tax-sheltered annuities, IRC Section 1035 exchanges of annuities or life insurance.

 

How Does a Deferred Income Annuity Differ from a Structured Settlement Annuity?


A structured settlement annuity can include a deferred income annuity type cash flow, as well as other types of cash flows in the same annuity contract.  You would need to assemble multiple annuity contracts of different types to accomplish what a structured settlement annuity can do with a single contract. A structured settlement annuity is a qualified funding asset used the settlement of legal claims or litigation, while a deferred income annuity is primarily used for retirement.


Last updated January 19, 2024


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