Beginner’s Guide to Longevity Annuities

A longevity annuity also called a deferred income annuity (DIA), is a contract between you and an insurance company. You pay a premium and in exchange, you get a guaranteed stream of income starting at a predetermined future date. The income lasts for the rest of your life.

A reliable income stream in retirement is one of the biggest concerns for folks later in life. The big worry is this: How can I ensure that I can pay my bills after I stop working?

Annuities provide a compelling answer. They offer tax advantages while you’re working along with a guaranteed retirement income when you’re finished your career. Longevity annuities, one of many different kinds of annuities, start paying that income at a predetermined time in the future.

Are longevity annuities right for you? We’ve outlined all the details below to help you decide.

What are Longevity Annuities?

An annuity is a contract purchased from a life insurance company. You start by paying the insurer a premium — either in a lump sum or in multiple payments over time. Depending on the type of annuity that money could earn interest and grow. Later, you can choose to annuitize. Annuitization initiates a series of periodic income payouts — for example, you could choose to receive monthly income payments. How long those payouts last depends on your particular annuity contract.

Fixed annuities are best for people that have lower risk tolerance and are looking for a safe place to put their retirement savings. They also pay a guaranteed minimum interest rate (sometimes called an interest crediting rate), so you can be certain your nest egg will grow.

All annuities offer significant tax advantages but not all of them are as low risk as fixed annuities.

There are many different types of annuities, each with different features. The specific characteristics that make longevity annuities unique are:

• Income start date. When you buy a longevity annuity, you choose a date in the future when the income will start. This could be between two and 40 years in the future. Note that you must annuitize on this date (whereas other annuity products simply offer you this choice).
• Lifetime income. Longevity annuities provide income payments for the rest of the annuitant’s life. You can usually also choose a joint life option. This means the annuity payments would last as long as both you and your spouse live.
• Payout benefits. The value of your annuity income is calculated when you buy. Calculations are based on your age, life expectancy, and when you choose to receive payments. For other annuity products, like the fixed annuities that Canvas Annuity sells, calculations for income payments are calculated when you elect to start receiving income payments.

As with other deferred annuities, your money would grow in your annuity at the specified crediting rate until you start receiving payments. The later you choose to start your retirement income, the higher your payments typically are.

Longevity annuities offer the same tax advantages that other annuities offer. One tax advantage is tax deferral. You pay ordinary income tax on your annuity income when you start to receive withdrawals but no tax on the gains as they build in your annuity.

Longevity Annuities Versus Immediate Annuities

Longevity annuities are similar in some ways to immediate annuities. Both of these financial products can offer guaranteed lifetime income, and you purchase both with premium payments to an annuity company. But, there are some important differences between the two.

• Premium payments. Longevity annuities let you pay your premiums in a single lump sum or in smaller payments over time. In contrast, you must pay your premiums for an immediate annuity in a single payment.
• Start of payouts. With a longevity annuity, you choose when you’ll start receiving your monthly payments at a time in the future. Immediate annuities start to provide annuity income right away or very soon after you buy them —usually, within a year.
• Crediting rates. You can buy immediate annuities as either fixed annuities, fixed-indexed annuities, or variable annuities. These last two products offer payments that fluctuate based on market performance. In contrast, longevity annuities are only offered with fixed interest rates.

These different characteristics make each type of annuity better for different people. The immediate annuity is ideal for individuals who are in — or close to — retirement. It is also best for people with a significant nest egg available to purchase right away. In contrast, the longevity annuity can be appropriate for people who are further away from retirement. It’s also suitable for individuals without significant retirement savings at their disposal.

Qualified Longevity Annuities Versus Non-Qualified Longevity Annuities

There are two subtypes of longevity annuities: qualified longevity annuity contracts (QLACs) and non-qualified longevity annuity contracts. These differ in how they’re taxed.

Read more: Qualified vs. Non-qualified annuities

Qualified Longevity Annuities. QLACs are funded through qualified retirement accounts like 401(k)s, pensions, or individual retirement accounts (IRAs) —both traditional IRAs and Roth IRAs can work. The money in these accounts is “qualified” because you have not paid income taxes on it. These are tax-deferred funds because you will owe taxes on each income payment you receive.

QLACs have some rules associated with them:

• Deposit (premium) limits. The IRS specifies the maximum amount you can use to purchase a QLAC. Their current limits are 25% of your retirement fund or $135,000 — whichever is less.
• Length of deferrals. You can only delay a QLAC as far as your 85th birthday.
• Required Minimum Distributions (RMDs). These allow you to defer RMDs past age 72 and up to age 85.

Non-Qualified Longevity Annuities. These are funded with income that has already been taxed. You don’t have to pay taxes on that money again — only the earnings would be taxable.

Both QLACs and non-qualified longevity annuities can be structured as a joint annuity, and continue to pay you and your spouse as long as one of you is alive. You can also choose to add cost-of-living adjustment increases (COLA), or even set the contract so that 100% of the unused principal money goes to the listed beneficiaries, rather than return to the annuity company. Note that there are associated costs for each of these add-ons.

Longevity Annuity Pros and Cons

As with every financial product, there are pros and cons to longevity annuities. Here are the main benefits and drawbacks:

• Peace of mind. Longevity annuities can guarantee a retirement income for the rest of your life. This hedges against longevity risk and provides retirees with a sense of certainty and stability.
• Guaranteed growth. The money in your longevity annuity grows until you start receiving annuity payments. The growth accrues at a fixed interest rate. The later you choose to start receiving payments, the higher your monthly income.

• Spouse protection. You can buy a longevity annuity just for you (single life), or you can include your spouse (joint life). With the latter, if you die before your spouse, they will continue to receive annuity income.
• You can buy using qualifying funds. A Qualified Longevity Annuity Agreement (QLAC) allows you to purchase the annuity with qualifying funds, such as those in a retirement account. This allows you to maintain the tax advantages of these accounts.
• Inflation protection. Some longevity annuities can be purchased with inflation protection. This ensures that your monthly income grows with a specified inflation rate. Inflation protection makes the annuity more expensive, but it can help decrease the risk that your money won’t be worth as much when you start to receive income.

While there are many advantages to this type of annuity, there are also some significant disadvantages. These include:

• Potential to lose funds. One downside of longevity annuities is that you could lose your money. The annuity pays you for the rest of your life ... but if you die early, that money transfers to the annuity company, not your heirs. You can protect against this with a death benefit or return of premium rider, which would return the portion of your initial investment that has not yet been paid in benefits. Just remember that these riders can be expensive.

• Lack of control. The flip side of secure income in retirement is that you lose access to this money in the short term. Money tied up in an annuity is generally not available to use for other investments. Early withdrawals can result in stiff financial penalties.

• You must annuitize. Many annuities, like the fixed annuity products Canvas sells, give you the option to annuitize ... but it isn’t required. You can simply keep that money growing and then transfer it to another retirement account at the end of the term. Longevity annuities don’t allow this flexibility — they require you to annuitize. Because the money is no longer available to you as a lump sum after purchasing a longevity annuity, you may want to be cautious about how much of your nest egg you place in this product.
• You need to trust your insurer. Always buy annuities from companies with good ratings and a history of solid financial performance.

Who is a Longevity Annuity Right For?

Should you buy a longevity annuity? Maybe.

Longevity annuities are best for people who want a guaranteed income stream and know when they want it to start. Like other annuities, they also offer tax benefits and guaranteed growth.

If you know you want the benefits of an annuity but aren’t sure when you want your retirement income to start, you may benefit from other kinds of annuities. Longevity annuities are also not the best choice for individuals who aren’t sure if they want lifetime income. If you aren’t sure, you may prefer a regular fixed annuity product that gives you the flexibility to choose whether to annuitize or not.

If you’re uncertain, talk to a financial advisor. Or, for more information on different kinds of annuities, feel free to reach out to our licensed representatives. They’re happy to help.

Key Takeaways

Longevity annuities provide guaranteed income for the rest of your life. This income can supplement your pension and social security check, providing a sense of financial security. It’s a kind of longevity insurance because it ensures you won’t outlive your retirement savings.

But longevity annuities have some major disadvantages, including that you have to take your income. Other kinds of annuities, like Canvas’ fixed annuity products, give you that option — but they let you decide. Many people actually choose not to annuitize.

Whether or not annuities are right for you depends on your needs and circumstances. If you’re still wondering if it’s a good idea, consider talking to a financial planner for guidance.

And what if you’re ready to buy an annuity? Apply online right here.