From the August 2014 issue of Investment Advisor • Subscribe!

Deferred Income Annuities: More Than Just Longevity Insurance

In the ongoing hunt for pension-like retirement income, deferred income annuities are heating up

In the ongoing hunt for stable, pension-like retirement income sources, deferred income annuities (or DIAs) are heating up as an increasing number of insurance carriers have begun to offer the products. Unfortunately, many clients continue to view DIAs only as a type of longevity insurance that can protect against the risk of outliving traditional retirement savings. As the market for these products expands, however, this common view has become more and more inaccurate—causing many clients to miss out on a product that can function as a powerful component in any retirement income portfolio.

Keeping current with respect to the flexible nature of these products can mean the difference between creating a well-rounded retirement income portfolio or missing the opportunity to purchase when the time is right.

DIAs: Common Misconceptions

In many cases, when clients hear about deferred income annuities, they think of an annuity product that requires an extended deferral period in order to begin payouts when the client reaches old age. While this type of product can be extremely useful in protecting the client against the risk of outliving his or her assets, many clients feel that the investment will be wasted if they do not live through the extended deferral period.

In reality, however, this form of longevity insurance is only one type of deferred income annuity, and many DIAs allow the client to choose to start receiving income within as little as 13 months—or as long as 45 years—after purchasing the contract. Clearing up this common misperception can vastly expand the use of deferred income annuities among clients—especially when they discover the flexibility that the DIA product can offer.

Finding Flexibility With DIAs

While clients have the option of choosing an annuity starting date that begins relatively quickly or far into the future with DIAs, these products often will allow the client to change the annuity starting date that he or she originally chooses. This gives the client flexibility, as circumstances can change over a longer deferral period.

Along the same line, DIAs can also protect against inflation risk by providing for cost of living adjustments that can give clients certainty that their income needs, which are always difficult to anticipate, will be met, even if the annuity starting date is as far as 45 years into the future.

Many deferred income annuities also allow clients to collect nonguaranteed dividends over the life of the annuity product. Clients have the option to collect the cash dividends offered or can reinvest the dividends into the annuity product to increase the guaranteed income stream.

This option gives clients the flexibility to invest dividend income elsewhere in strongly performing equity markets but also allows them to keep the added income within the secure annuity product in a down market.

Further, while a traditional annuity will usually require the client to make one large lump sum payment to purchase the annuity, many deferred income annuities allow the client to make multiple contributions. This lets the client spread the purchase over a period of time prior to the income starting date, which can alleviate some of the downside risk of locking a large portion of his or her savings into the contract with no expectation of return for several years.

The expanding market for deferred income annuities has made these products increasingly useful for clients looking to lock in a secure retirement income source. Dispelling the common misperception that these products are only useful in protecting against extended longevity, however, is crucial to helping clients see the ever-increasing utility of the DIA. —William Byrnes and Robert Bloink

Reprints Discuss this story
This is where the comments go.