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Deferred Income Annuities Can Double Payouts Later in Life

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Regardless of how well a client has planned for retirement, worrying about the possibility of outliving retirement savings is often inevitable, especially for those relatively healthy clients. Now, however, some well-prepared clients have a new option in using deferred income annuities to double the otherwise available payouts late in life, when the risk of outliving savings is the greatest—by choosing a no-refund deferred income annuity. 

Like any other strategy involving financial products in planning for retirement income, however, while the prospect of doubling annuity payouts appeals strongly to some clients, this option also has potential downsides that can make it unattractive for others.

The No-Refund Strategy

Deferred income annuities are essentially annuity products that contain a deferral period after the initial purchase, so that payments begin late in retirement after a client has often exhausted other retirement income sources. While the length of the deferral period can be flexible, traditionally these products begin payments when a client has reached old age (typically 80 or 85) and needs a Social Security supplement.

Because of this, many clients choose to add a return-of-premium feature to the contract that will allow beneficiaries to recoup premium payments in the event that the client does not live long enough to reach the end of the deferral period.

Despite this, that return-of-premium feature can be costly and many clients have discovered that by foregoing this option and purchasing a no-refund deferred income annuity, they can more than double their annuity payouts once they reach old age. This option can be beneficial for the relatively healthy client who feels that he or she has a good chance of living past 85—a scenario that becomes more and more common with advances in medical care.

By foregoing the return-of-premium option, the client increases his or her payouts so that the premium is recovered much more quickly—often within a period of just a few years.  In these cases, the return-of-premium feature becomes unnecessary because premium payments will be recovered more quickly, allowing for a greater income supplement late in retirement for a relatively low price. 

If the client lives far past the end of the deferral period, he or she will receive the higher payout for the remainder of his or her life.

Potential Pitfalls

While foregoing the return-of-premium option can be attractive for a client who has prepared well for retirement and is only concerned with the possibility of outliving savings because of increased longevity, the strategy does create the risk that the client’s investment will be lost. The primary appeal of the return-of-premium option is that it eliminates this risk, which is often the reason clients avoid deferred income annuities in the first place.

However, clients should also be aware that many modern deferred income annuities allow for a much shorter deferral period (some offer deferral periods as short as 13 months), reducing the risk that the client will not live long enough to begin payouts while also decreasing the need for the return-of-premium option.

The client’s overall expectation of outliving his or her savings should be taken into account in deciding whether the no-refund strategy is the right fit—a healthy client with a good prospect of living past the deferral period obviously has less risk of losing his or her investment even with the no-refund option.


Deferred income annuities can provide a powerful safety net for clients who are worried about outliving assets in traditional retirement accounts—and the no-refund option provides a way for clients to optimize the income aspect of the contract without requiring additional premium payments.

Originally published on Tax Facts Onlinethe premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.    

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