Guaranteed Income for Life, Part 2: What is a Contingent Deferred Annuity?

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This is the second part of my two-part series, “Guaranteed Income for Life,” in which I examine the benefits of the contingent deferred annuity (CDA), and whether it’s poised to become the next big thing in retirement. In Part 1, “Can Contingent Deferred Annuities Become a $100 Billion Industry?”, I contrasted the need for lifetime income with the hesitance many Americans feel when confronted with the decision of whether to buy one. I also described a solution proposed by Dr. Moshe Milevsky… a solution that sounds a lot like a CDA.

A CDA is structured such that the annuity guaranty of income for life, underwritten by a life insurance company, is held separately from the underlying investments. The CDA is conceptually a combination of product and process, in that the benefits it offers go into effect when the depletion of the covered portfolio occurs while the insured(s) remain alive.

The CDA, rather than starting income immediately or on a preset future date, begins to pay out at an unknown future date, contingent upon the value of the portfolio being fully withdrawn. This is the point at which the insurer begins paying regular income to the purchaser of the guarantee from the insurer’s account rather than from the client’s account. As Milevsky artfully put it, the “life annuity begins when your portfolio dies.”1