What is longevity insurance (deferred income annuity) and when is it optimal?

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AcadiFi · Accepted Answer

A deferred income annuity (DIA), often called longevity insurance, is purchased at one age (say 65) with payments beginning at a later age (say 85). The deferral amplifies mortality credits dramatically because many purchasers will not survive to the payout date; their premiums fund rich payments for survivors. Example: a 65-year-old buys a $50K DIA with income starting at 85; the contract might pay $28,000 per year for life. A comparable immediate annuity purchased at 85 for $50K would pay only a fraction because fewer premium years compounded. DIAs are optimal for investors who (a) expect to spend down liquid assets through their 70s and early 80s, (b) face tail longevity risk — a 30% chance of living past 90, (c) want to convert a small slug of capital into insurance against outliving savings without annuitizing a large portion now. A $50K DIA purchased at 65 with payments at 85 effectively budgets a 20-year self-funded retirement window — the investor plans discretionary spending from the liquid $450K knowing the DIA backstops post-85 essentials. CFA L3 framing pairs DIAs with a systematic withdrawal plan: allocate to cover essential spending post-deferral age, liquid portfolio funds the deferral window. The 2014 U.S. Treasury QLAC rule carved out DIAs inside qualified retirement accounts from RMD calculations up to a limit, giving tax-deferred longevity hedging. Counterparty risk (insurer default) is the key concern — diversify across insurers or stay within state guaranty limits.

What is longevity insurance (deferred income annuity) and when is it optimal?

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