Question 1

What is a contingent deferred annuity?

Accepted Answer

A contingent deferred annuity (CDA) is an insurance contract that provides a guaranteed lifetime income benefit applied as an overlay on non-insurance investment assets (such as a brokerage or managed account) held in the investor's own name. The guarantee is "contingent" on the account being depleted to zero: the insurance company only begins paying when the underlying account reaches zero. Until then, the investor draws income from their own assets.

Question 2

How is a CDA different from a variable annuity?

Accepted Answer

The key structural difference is asset location. In a variable annuity, the investor transfers assets into the insurance company's separate account. In a CDA, the assets remain in the investor's own account and the insurance guarantee is applied as an overlay. CDAs are also regulated solely as insurance products, while variable annuities are regulated as both insurance and securities. CDAs may offer more flexibility and portability, but the total cost and investment restrictions vary by product.

Question 3

Are CDAs regulated?

Accepted Answer

Yes. CDAs are insurance products regulated at the state level by state insurance departments. Each state must approve a CDA product before it can be sold in that state. The National Association of Insurance Commissioners (NAIC) has developed guidance on CDA regulation through its CDA Working Group. The underlying investment account linked to the CDA may also be subject to securities regulation.

Question 4

Are CDAs covered by state guaranty associations?

Accepted Answer

This is uncertain and varies by state. State life and health guaranty associations provide a safety net if a licensed insurer becomes insolvent, but coverage for CDAs is not uniformly established. CDAs are a relatively new product category, and guaranty association coverage rules vary. Do not assume full coverage. Contact your state's guaranty association for information specific to your state.

Question 5

What fees are involved with a CDA?

Accepted Answer

CDA costs typically include: (1) the CDA insurance charge, an annual fee for the guarantee typically expressed as a percentage of the benefit base or account value; (2) investment management fees for the underlying account; and (3) advisory fees if the account is managed by a financial advisor. Total costs can range from under 1% to over 2% annually, depending on the product and platform. Always obtain a full fee disclosure before purchasing.

Question 6

Can I lose money with a CDA?

Accepted Answer

Yes. A CDA does not protect the account value from market losses. The underlying investment account can decline in value due to poor market performance. The CDA guarantee only ensures that income will continue if the account reaches zero; it does not prevent losses or guarantee a minimum account value. Investors may experience significant account value declines before the guarantee activates.

Question 7

What happens if the insurance company fails?

Accepted Answer

If the issuing insurance company becomes insolvent, the CDA guarantee may be impaired. State life and health guaranty associations may provide limited protection, but coverage for CDAs is uncertain and varies by state. This is why evaluating the financial strength of the issuing insurer (using ratings from AM Best, S&P, Moody's, or Fitch) is an important part of the due diligence process.

Question 8

Are CDAs available in all states?

Accepted Answer

No. CDAs must be approved by each state's insurance department before they can be sold in that state. Availability varies, and some states have not approved CDA products. Before purchasing, verify that the product is approved in your state.

Question 9

How are CDA payments taxed?

Accepted Answer

The tax treatment of CDA payments depends on the type of account in which the CDA is held and the nature of the payments. When the insurance company begins paying guaranteed income (after the account depletes), those payments are generally treated as ordinary income. The tax treatment of CDA fees and guarantee payments can be complex. Consult a qualified tax professional for guidance specific to your situation. See also: IRS Publication 575 (Pension and Annuity Income).

Question 10

Is a CDA right for me?

Accepted Answer

CDAs are not appropriate for all investors. Whether a CDA is suitable depends on your financial situation, income needs, risk tolerance, time horizon, other income sources, and the specific product terms. This site does not provide personalized financial advice. Consult a qualified financial professional who can evaluate your individual circumstances.

Question 11

What should I ask my advisor about a CDA?

Accepted Answer

Key questions include: What is the total annual cost (insurance fee + investment fees + advisory fee)? What is the guaranteed withdrawal rate and how is it calculated? What investment options are available and are they restricted? What is the financial strength rating of the issuing insurer? Is the product approved in my state? How does the benefit base work and when do step-ups occur? What happens to the guarantee if I die? See the Advisor Due Diligence Checklist for a comprehensive list.

Question 12

Can I cancel a CDA?

Accepted Answer

Yes, but there may be costs. Most CDA contracts include a free-look period (typically 10–30 days from delivery) during which you can return the contract for a full refund. After the free-look period, terminating the contract may trigger a surrender charge if you are within the surrender charge period. Terminating the CDA ends the insurance guarantee, but the underlying investment account continues.

Question 13

What is a benefit base?

Accepted Answer

The benefit base is a notional (not real) dollar figure used to calculate the guaranteed withdrawal amount. It is not the same as the account value; it may be higher if step-up provisions have locked in market gains. The benefit base does not represent cash that can be withdrawn in a lump sum. It is used solely to determine the annual guaranteed income amount.

Question 14

What investment options are available with a CDA?

Accepted Answer

CDA contracts typically restrict the underlying investments to an approved list of funds or asset classes. Many CDAs require the use of volatility-managed or risk-controlled investment strategies. The available options vary by product and insurer. Review the approved investment list carefully to ensure it is consistent with your investment objectives.

Question 15

How does the income guarantee work if my account goes to zero?

Accepted Answer

If the underlying investment account is depleted to zero through a combination of withdrawals and investment losses, the insurance company begins paying the guaranteed income amount directly to you. The amount is based on the guaranteed withdrawal rate applied to the benefit base at the time of depletion. These payments continue for your lifetime (or the lifetime of you and your spouse, if the contract includes spousal continuation). The payments are an insurance obligation of the issuing company.

Question 16

What is the difference between a benefit base and account value?

Accepted Answer

The account value is the actual market value of the investments in the linked account: real money that fluctuates with market performance and is reduced by withdrawals and fees. The benefit base is a notional figure used to calculate the guaranteed income amount. The benefit base may be higher than the account value if step-ups have locked in gains. The guaranteed income is calculated on the benefit base, not the account value.

Question 17

Do CDAs have a death benefit?

Accepted Answer

CDA contracts generally do not include a separate death benefit like some variable annuities. However, because the underlying assets remain in the investor's account, any remaining account value at death typically passes to heirs through the normal account beneficiary designation process. Review the specific contract terms for details.

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