What is a Deferred Income Annuity (DIA)?

The Annuity Man

Single Premium Immediate Annuities (SPIAs) are the granddaddy of all annuities.  They have been around since the Roman times, and are a simple transfer of risk pension strategy that has no annual fees and is easy to understand.  Income can start as early as 30 days after the policy has been issue, or those payments can be deferred for a year.  Pretty basic pro-consumer stuff.

Once you defer past that one year time period, a SPIA turns into a DIA (Deferred Income Annuity).  It’s the same structure.  No moving parts.  No annual fees.  No market attachments.  If Warren Buffett recommended annuities, he would suggest a SPIA or a DIA for your lifetime income needs because they are simple and easy to understand.

Future Pension Strategy

DIAs allow you to defer payments as short as 13 months and as far out as 40+ years, depending on the carrier.  In my simplistic contractual guarantees only world, SPIAs solve for “Income Now” while Deferred Income Annuities (DIAs) solve for “Income Later.”

DIAs can be used in Traditional IRAs, non-IRA (i.e. non-qualified) accounts, and Roth IRA structures.  The contractual guarantees are the same regardless of the account you use, the only difference is how the income will be taxed.  In a Traditional IRA, all of the income stream is taxed at ordinary income levels.  In a non-IRA account, a portion of that income stream is taxed while the other part is not taxed at all.  DIA income is a combination of return of principal plus interest…so only the interest portion is taxable.  With a Roth IRA, DIA income is completely tax-free.

DIA Limitations & Benefits

A limitation of a DIA that you need to be aware of is that there is no “trackable” interest rate growth during the deferral time period.  In other words, if you die 5 years into a 10 year deferral, your beneficiaries will get all of your initial premium back with no interest.  However, the longer you let the annuity company “hold” onto the money, the more they will enhance (i.e. increase) the contractually guaranteed payment.  In the south we would call that, “the more it cooks, the more you get.”

The benefits of DIAs are many.  Deferred Income Annuities (DIAs) can be customized, from a structuring standpoint, to achieve your specific goals.  You can set it up single life, joint life, or period certain.  You can also combine life with a period certain.   

You can also customize the structure of the payments to guarantee a lifetime income stream and assure that 100% of any unused money goes to your listed beneficiaries.  In other words, the annuity company doesn’t keep a penny.  Those structure names are “Life with Installment Refund” or “Life with Cash Refund.”  Installment Refund means your beneficiaries receive the same payment level until the money is exhausted.  Cash Refund means the beneficiaries receive a lump sum when your "Learjet hits the mountain."

Like all annuities, DIA quotes are like a gallon of milk because they expire every 7 to 10 days unless you lock in those contractual numbers during the application process.

No ROI till you DIE

Annuities are the only product category that contractually guarantees an income stream regardless of how long you live.  It's a pure transfer of risk strategy with no way to know the return on investment (ROI) until you die.  This fact drives most investors crazy because they look at annuities as investments, when annuities are actually contracts between you and the issuing life insurance company.

Do you care what your ROI will be on your Social Security payments?  Do you try to figure out the ROI on your pension income (if so fortunate)?  Of course not!  You just like the fact that the income hits your bank account every month, and will continue to go into your bank account until you die.  That's the peace of mind "income flooring" guarantees that most people desire.

Deferred Income Annuities (DIAs) should be looked at as your own personal Social Security or pension payment.  It's a lifetime income stream that will pay regardless of how long you live, just like the other two.  It's that simple, and probably a good reason to start learning more about DIAs and maybe get a quote to see how much contractually guaranteed income you can receive for your specific situation.

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