Immediate vs Deferred Annuity

A single premium immediate annuity (SPIA) and a deferred income annuity (DIA) are essentially the same contract with different start times. Both convert a lump sum into guaranteed lifetime income. The SPIA starts paying within 12 months. The DIA starts paying years later.

Choosing between them is a function of three things: when income is actually needed, the consumer’s other income sources during the gap years, and how much the consumer values longevity protection.

How the products differ

SPIA. A 65-year-old pays $100,000 today. The carrier pays approximately $600 per month for life, beginning the next month. The payment is fixed and lasts until the annuitant’s death.

DIA. A 65-year-old pays $100,000 today with income starting at age 80. The carrier pays approximately $2,200 per month for life, beginning at 80. The consumer receives nothing between 65 and 80.

The DIA pays nearly 4x the monthly income, but only after a 15-year wait. The math works in the DIA’s favor because of two compounding effects: the carrier earns yield on the premium during the deferral, and mortality credits accumulate from contract owners who die during deferral.

When SPIA fits

A SPIA is the right product when income is needed now (or within 12 months). Common scenarios:

• The consumer is retiring and needs to replace earned income immediately
• Social Security has been claimed but is below essential expenses
• The consumer is single with no spouse or beneficiary obligation
• The consumer’s other assets are sufficient for late-life needs without longevity insurance

When DIA fits

A DIA is the right product when the consumer has a defined income gap in late retirement. Common scenarios:

• The consumer is concerned about outliving their portfolio (longevity risk)
• The consumer has sufficient resources for years 65-79 but uncertain about 80+
• The consumer wants to maximize lifetime income per dollar of premium
• The consumer can lock up the DIA premium for 10-20 years

QLAC: the IRA-funded variant

A QLAC is a DIA funded with qualified retirement money that meets IRS rules for exclusion from RMD calculations. The premium (up to $200,000 under SECURE 2.0) is removed from the IRA balance used to compute RMDs.

For a consumer with $1 million in an IRA and limited need for RMDs in early retirement, allocating $200,000 to a QLAC reduces annual RMDs by approximately $8,000 (at a 4% RMD rate). The deferred income from the QLAC starts at the elected age (no later than 85).

Mortality credits in action

The reason DIAs pay so much more per dollar than SPIAs is mortality credits. Some contract owners die during the deferral period. Their premiums subsidize continued payments to those who survive.

This is the structural feature that makes life-payout annuities different from a self-managed bond portfolio. A bond ladder returns principal and pays interest. An annuity returns principal, pays interest, AND adds mortality credits. The credits compound with each year of deferral and with the annuitant’s age at the start of payout.

For a consumer who lives to 95, a DIA starting at 80 produces materially more lifetime income than the same premium invested in a bond ladder.

When neither fits

Both SPIA and DIA assume the contract owner will not need access to the principal again. The premium is largely irrevocable (subject to the free look period and limited commutation features).

If liquidity matters, an FIA or MYGA with optional income rider is a better fit. The income rider provides guaranteed lifetime income while preserving access to the contract value through the free withdrawal allowance.

How to compare quotes

When comparing SPIA quotes across carriers, match every variable exactly:

• Premium amount
• Age and sex of annuitant(s)
• Payout type (life only, life + period certain, joint and survivor, cash refund)
• Start date

A 5% to 15% spread between the highest and lowest competitive SPIA quote for the same parameters is normal. The spread comes from carrier-specific mortality assumptions, expense loadings, and portfolio yield.

For DIA quotes, add:

• Deferral length (start date)
• Any return-of-premium death benefit during deferral

For methodology, see the SPIA pillar and DIA pillar.