What’s a Longevity Annuity?

Published September 1, 2017
A longevity annuity is like a pension you can buy for yourself from an insurance company using your pre-tax or post-tax retirement savings, generating a guaranteed income that lasts as long as you do. It’s a great way to diversify your portfolio, and make sure that all, or most, of your basic retirement expenses will be covered for as long as you live.
  • A longevity annuity is a pension-like income stream you can buy for yourself using pre-tax or post-tax savings
  • It creates a retirement paycheck that continues for as long as you live
  • Purchased at least two years before retirement/you want income to start

Let’s talk about the longevity annuity (sometimes also referred to as a deferred income annuity or DIA). It’s a type of income annuity which generates your retirement ‘salary’ and lasts for as long as you live. You put a portion of your pre-tax or post-tax savings towards purchasing a longevity annuity and start receiving your monthly paycheck 2+ years from when you purchase. Whether purchased with your retirement or personal savings, a longevity annuity turns your assets into guaranteed income for life.

Let’s break it down:

A longevity is an…income annuity.

An income annuity is a contract between you and an insurance company. In exchange for a one-time premium, the insurance company promises to give you a steady, guaranteed paycheck for life, like a pension. The size of the paycheck is specified when you purchase, and depends on factors such as how much premium you paid, your age, and gender.

More specifically, it provides…future income.

A longevity annuity means you’ll start getting payments 2+ years after paying the premium. In contrast, immediate annuities begin payments right away. During the deferral period, the insurance company invests your money on your behalf. The longer you delay your income start date, the greater the size of the payments they’ll be able to offer you.

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

Qualified longevity annuities are purchased with pre-tax money from your 401(k), traditional IRA, or other qualified plan. The money is transferred penalty and tax-free, but all paychecks you get during retirement will be taxed at ordinary income tax rates. Longevity annuities are subject to required minimum distributions (RMDs), meaning income must begin by age 70 1/2.

Non-qualified longevity annuities are purchased with post-tax savings. Therefore, they’re not subject to RMDs and income can start after age 70 1/2 . Also, you don’t need to worry about being taxed twice on the money used to purchase a longevity annuity, as only a small portion of each retirement paycheck gets taxed.

QLACs fill the void left by qualified and non-qualified longevity annuities: you can use pre-tax (qualified) savings but begin distributions as late as age 85. However, you can only put the lesser of $125,000 or 25% of your IRA in a QLAC (other longevity annuities don’t have a contribution limit).

In summary, the longevity annuity (otherwise known as the deferred income annuity or DIA) is like a pension you can buy for yourself from an insurance company using your pre-tax or post-tax retirement savings, generating a guaranteed income that lasts as long as you do. Income starts 2+ years after purchase, which allows the insurance company to increase the income they can offer you. It’s a great way to diversify your portfolio, and make sure that all, or most, of your basic retirement expenses will be covered for as long as you live. 

Lauren Minches

Lauren Minches

Financial Planning Professional

Lauren is an actuary by training with expertise in retirement, finance, and risk. She writes about annuities to make them easier to understand and evaluate. Her goal is to help people create retirements with more time for living and less time thinking about money.