What is longevity insurance (a.k.a. a longevity annuity or a Deferred Income Annuity)?

Longevity insurance provides guaranteed and predetermined income in retirement. Also known as a Deferred Income Annuity, the product protects you against the risk of outliving your savings. When you buy a DIA, you commit money now in exchange for a future monthly paycheck continuing for as long as you’re alive. Whether purchased with your personal or retirement (401(k), IRA) savings, a DIA turns your assets into guaranteed income for life. Think of it like a pension you buy for yourself.

Income Annuity (DIA) and how does it work? What is a longevity annuity? What is longevity insurance?

The best way to understand what longevity insurance provides is to break down what the product actually is.

Whether it’s called longevity insurance or something else, it’s actually… an income annuity.

An income annuity is a contractual agreement between you and an insurance company. In exchange for a lump-sum premium, the insurance company promises to give you a steady, guaranteed paycheck for life (or a certain period of time, a less-common version of the product). The size of the paycheck is specified upfront and depends on factors such as your premium, age, and gender.

More specifically, it’s… a deferred income annuity.

A Deferred Income Annuity begins annuity payments at a future date, typically 2-40 years after the premium is paid. (In contrast, immediate income annuities begin payments within 1 year.) During the deferral period, the insurance company invests your money on your behalf. The longer you delay starting to receive payments, the greater the size of the payments they’ll be able to offer you.

And finally, a longevity insurance purchase can be… qualified, non-qualified, or a QLAC.

Qualified DIAs are purchased with pre-tax money from your 401(k), traditional IRA, or other qualified plan. The money is transferred penalty-free and will not incur any taxes during the deferral period. DIAs are subject to required minimum distributions (RMDs), meaning that income must begin by age 70½.

Non-qualified DIAs differ in that they are purchased with post-tax savings, are not subject to RMDs, and thus can be annuitized after age 70½. In addition, the taxes incurred once distributions begin will be lower to avoid taxing the money used to purchase the DIA twice.

Qualified Longevity Annuity Contracts (QLACs) fill the void left by qualified and non-qualified DIAs: the ability to use pre-tax qualified savings but begin distributions after age 70½. This type of DIA has the added benefit of deferring a portion of your RMDs until as late as age 85.

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Head to the DIA Guide to learn more about the product, its benefits, and next steps for buying.