DIA Deferred Income/Longevity Annuities

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Stan: Hi, I’m Stan The Annuity Man sitting here with,

Gary: Gary from CANNEX.

Stan: We’re talking about Deferred Income Annuities, Gary. A DIA is also called a Longevity Annuity by the financial press at times. Deferred Income Annuities are for income later. We’ve talked in another video about Single Premium Immediate Annuities, or Income Now. The Deferred Income Annuity structure is similar to the Single Premium Immediate Annuity design. It’s kind of an offshoot. Explain that.

Gary: That’s right. So, instead of purchasing your pension and getting your income right away, you can make that purchase, but you’re going to wait for a while. In other words, you keep it in the oven and let it cook a little bit. The payout that you get on a DIA is a little bit higher, or even a lot higher, than what you would typically get from an Immediate Annuity.

Stan: So the more you let it cook with the annuity company, the more they enhance the payout. Enhance, in the South, where I’m from, means up more.

Gary: Exactly right.

Stan: Okay, got it. In essence, it’s similar to an Immediate Annuity structure. Immediate Annuity means Income Now, and the Deferred Income Annuity means Income Later.

Gary: That’s right. You’re transferring your risk. You’re getting a return of not only principal and interest, but also your mortality credit, or as we say, “the last man standing” credit.

Stan: Go through “the last man standing”, so people understand mortality credit from an elevator-speak standpoint.

Gary: Sure. So when you’re investing in these products, you’re investing with a number of other people at the same age, and you have a common life expectancy. Let’s say your life expectancy is 85-years-old: 50% of you are expected to live past that age; 50% of you are not expected to make it up to that age. So when you’re in that pool of people, over time, as people start passing away, the remaining people in that pool will essentially receive the money, or the credit, so that they can continue with their lifetime payments.

Stan: So like an Immediate Annuity, it’s a return of principal plus interest and mortality credits, right?

Gary: That’s correct.

Stan: We’re talking about Income Later, so Immediate Annuities are a year in for most cases, but Deferred Income Annuities start payments two years out at least. How far out can you go?

Gary: 30, 35, 40 years.

Stan: So if you have that wandering ambiguity child that you know is never going make any money in the future, you buy them the Deferred Income Annuity to have the income start when they become adults, so at least they can buy groceries.

Gary: Sure, that’s exactly right. You’re making a very good point, because somebody who’s nearing retirement, let’s say somebody in their mid-to-late 50’s who doesn’t have a pension can start buying into one of these contracts. They can start creating their own pension in the same way that they can catch up in a 401K and invest more than the typical person contributing to their 401K.

Stan: It’s a pension.

Gary: It’s a pension. To your point, you can buy them for children as well, to help satisfy their needs later in life too.

Stan: Single Premium Immediate Annuities you can set up for life long payments, payments for a period of time, or you can combine those. Are DIA’s the same?

Gary: Absolutely.

Stan: DIA’s are similar to SPIAs:

  • There is a similar structure
  • It’s a transfer of risk product.
  • You can run it single or joint with a spouse.
  • You can use IRA or non-IRA money. People call it “non-qualified.” I call it “non-IRA.” So if you have non-IRA money you want to use, you can do that.
  • Typically the annuity carriers will allow you to defer payments up to 70-years-old. We’ll talk also in this video series about the sister product of the DIA, the QLAC, which you can use in your Traditional IRA deferring up to age 85.

So tell me a little bit about where the DIA fits. It’s a life-expectancy bet just like an Immediate Annuity, right? In essence you say, “I think I’ll live longer than the actuaries think I’ll live. If I do, the annuity company is on the hook to pay me”. There’s no ROI until you die. Where does a DIA fit in the portfolio?

Gary: Let’s say you’re 10 years away from retirement, and you already have an estimate as far as what your social security check is going to be. If you’re lucky enough to have a pension, you have a pretty good idea what that payment’s going to be, and you may already have a good idea of what your living expenses could be when you’re hitting retirement. Let’s say that’s age 65, in this case. So with a DIA, you can essentially look to see what the gap-fill amount would be to cover your expenses at that time, knowing what your other sources will guarantee for life-time income. You may only have to put in a certain amount of money to meet that gap. Using an Immediate Income Annuity to fill a gap in income you need a higher premium. It could be much higher, because you don’t have that deferral period working for you.

Stan: So you can submit a lump sum amount to find out what it will pay, or you can enter a gap-fill amount. You can say, “I need this amount of money per month,” and then figure out how much premium is needed. Obviously, like Single Premium Immediate Annuities, the older you are when you turn on the income stream the higher the payment.

Gary: Right.

Stan: So, every annuity contract on the planet has limitations and benefits. Let’s talk about the benefits of the product since we’re on that, and then we’ll talk about limitations. What are the benefits of a Deferred Income Annuity/Longevity Annuity?

Gary: The main benefits of DIAs:

  • They are simple to understand.
  • The only difference between the immediate (SPIA) and this (DIA) is that you get to defer your payment and get a little bit more bang for your buck, if you will.
  • It’s a transfer of the risk of outliving your money, from you to the annuity carrier.
  • It can meet that gap need or that income floor needed in your portfolio.

Stan: They are easy to understand. I always tell people: If you can explain your annuity strategy to a nine-year-old, (no offense to nine-year-olds, okay?), and they understand it, then you might want to buy it. Never buy an annuity that you can’t understand or explain. Never buy that product.

The limitations of DIAs are similar to Immediate Annuities. First, talk about liquidity. Are these annuities irrevocable?

Gary: These Deferred Income Annuities are not necessarily irrevocable, and there is limited liquidity.

Stan: People say, “Hey, you’re ripping the knob off the water faucet, water’$ coming.”, but there are some provisions contractually to allow for changes

Gary: They’re limited, but the rules are there, and most of the contracts sold today have some type of liquidity as well. Yes, there’s limited liquidity. You’re giving up some of that flexibility for that long-term commitment and that long-term guarantee. That being said, there are some provisions where you can change your mind and get out of the contract. Even though you’re locked in. In the case of a Deferred Income Annuity, say you’re waiting 10 years before that first payment, but you decide to retire earlier, you typically have at least one shot to change that payment start date.

Stan: Another perceived limitation is that there are no market attachments associated with a Deferred Income Annuity. One of the things people always say about DIAs is, “Hey, Stan. I gave you this money, and I’m deferring for this time, but I don’t see any interest rate growth. I don’t see any market growth.” Now, the annuity companies come back and say, “Well, we’re growing your money, because we’re enhancing the payment on the back end.” It’s kind of a limitation, though, because there’s not that growth. Correct?

Gary: Right, you don’t have access to that market participation or growth with that contract. You know what you’ll be getting when the guaranteed income stream starts.

Stan: The public and even some financial planners and agents have misconceptions about these products. Some people say, “Hey, I hate all annuities.” You can’t say that. They aren’t all the same, there isn’t a “best annuity”. They are situational products that should be chosen based on the consumer’s particular situation and needs. It is a common misperception that interest rate levels alone should determine the decision to purchase annuities. That being said, should you time the purchase of annuities to interest rates?

Gary: You can, but the thing is if you need income, you need income. There are times, if you’re conservative or concerned about interest rate movements, then you can buy a little bit at a time.

Stan: So, you can stack annuities to address the possibility of rate changes going up or down. You don’t have to avoid the product category just because the rates aren’t at Jimmy Carter era levels. Not only can you stack DIAs with DIAs, but you can stack them with SPIAs, QLACs, and MYGAs too. Not only can you stack different types of annuities, but there are many ways to structure contracts to meet individual needs while taking into consideration current or future rates.

As with Immediate Annuities, I get comments all the time like, “Hey, Stan. When my Learjet hits the mountain, the money goes poof. The annuity company keeps it, so I hate annuities and the annuity company.” Payments ending when you die is only one way to structure it, though, right?

Gary: Right. They refer to that as a “Life Only” contract, but most annuities purchased today have some form of death benefit available, whether it’s through a Period Certain designation or a Cash Refund.

Stan: A Life Only annuity contract obviously is going to have the highest payout, because you’re accepting the risk of dying early (before your premium has been paid back fully). Right? But most people don’t choose to do that, right?

Gary: No. With some advanced financial plans, you may go with something like that, if you feel you have other instruments that you’re putting into the portfolio.

Stan: Okay, summarizing the misconceptions and limitations and benefits of Deferred Income Annuities:

  • Locked in rates can be seen as a limitation or a benefit, dependent on how you structure the contracts. We just talked about locked in rates as a limitation, but you can stagger contracts to take advantage of possible changes in rates.
  • A lack of available market growth is seen as a limitation, but there is an enhancement. The longer the money cooks at the annuity company, the more they’re going to pay you. The older you are when you turn it on, the higher the payment, because you have less life expectancy.
  • This is a pension similar to social security in a portfolio. Dependable income is definitely a benefit.

 

I love when people say, “I hate all annuities.” I go, “Do you hate social security? You hate those payments?” They’re like, “No, I like those.”

A DIA, a Deferred Income Annuity, is really similar to social security or a pension payment, because people use it in the same way. As in, “Hey, Gary. I’m going to wait until 70 to turn it on, because I’m going to get a higher payment.” Same thing works with DIA’s, right?

Gary: Yes, it does.

Stan: People need to understand the reason CANNEX is such an important part of the process of finding an annuity.

Cannex quotes the annuity world, not just one favorite annuity with high commissions. You quote the DIA world based on the specific information that’s provided by annuity buyers and customize the quote to their parameters. Cannex shows the top contractual guarantees based on individual input.

Gary: Yes.

Stan: So if somebody says, “I’ve got the best DIA.”, consumers need to understand they don’t! When you go into a CANNEX quote, I like that you don’t know who’s going to finish first, or second. People ask me all the time, “Well, can we run the quote, Stan? Who do you think, or who do you like?” I don’t know. We find out, alright? So let’s take a look at some DIA quotes to show people how these work on the Cannex platform.

Gary: Okay, let’s take a look here. So let’s take Robert and Mary our sample couple,

Stan: from Texas.

Gary: Let’s just run a Single Life just to see how his quote comes out.

Stan: So, we’re running a Deferred Income Annuity. How long is he deferring for?

Gary: Let’s see here. He’s going to defer for five years. So let’s say he’s 65 today, and his first payment will be at 70-years-old. Okay? So, he’ll put in about $100K, and we’ll take a look at what he would get back. That’s about $780 dollars per month (~November 2017).

Stan: For a lifetime of payments?

Gary: Lifetime, with no death benefit. That will be the highest juice he can get out of this type of contract.

Stan: Got it.

Gary: Let’s say, he waits until he is 70-years-old to buy an Immediate Annuity.

Stan: Working with hypothetical rates here; they could change. So, what’s the difference in payment levels between a SPIA and a DIA deferred 5 years, quoted on the same day??

Gary: Right, he didn’t have it cooking at the insurance company. If he shows up and actually buys at age 70, at today’s rates, that payment would only be $620 dollars per month. If he lets it cook at the insurance company in a DIA, you see that rate is higher. ($780/month)

Stan: They annuity carrier rewards him for letting them hold the money, which is, in essence, the whole thing about a Deferred Income Annuity.

Gary: Exactly right. Let’s show another aspect of this quote system. Let’s say he does want to have a death benefit. Let’s say he wants to put a Cash Refund on the policy in case his Learjet gets hit by a bus or a Bentley-put all those together. Instead of $780 a month (for a Life Only policy), it will reduce about $100 dollars a month, so he would only get about $680 dollars monthly with a Cash Refund.

Stan: The benefit of a Cash Refund is that when an annuitant dies, the lump sum goes to the listed beneficiaries of the policy, and the evil annuity company doesn’t keep a penny?

Gary: Right.

Stan: Okay, got it. Anything else?

Gary: That should do it. Essentially, you would look at these products in the same way that you would plan for your first social security check or your first pension payment. You plan and know exactly when you’re going to get that first payment.

Stan: So let’s wrap up. Deferred Income Annuities are the most simplistic solution for Income Later, similar to a pension plan. If you like your social security, Gary, you’re going to love Deferred Income Annuities, because it’s the same structure. The longer you wait to turn on the income, the higher the income stream. What I like about CANNEX is you customize the quote to individual consumers. CANNEX will take your specific situation into consideration. They run it live through the system to show the highest contractual guarantees.

To do this you simply input:

  • whatever state you live in
  • your dates of birth
  • your customized contract and payout parameters

CANNEX shows us the highest contractual guarantees available to you when you’re looking for Deferred Income Annuities, and other annuities. Gary, what do you want the people to know about Deferred Income Annuities?

Gary: I think a great fit is somebody who’s looking ahead. They see that runway towards retirement or that future income need and they say, “I have a chance to start building up that income floor.”

Stan: Yes, DIAs provide future income payments just like a pension or social security.

Gary: It doesn’t have to be only one contract either. It can be accomplished with multiple premiums. It’s a way to plan ahead and start building something for the future.

Stan: Well said. I’m Stan The Annuity Man,

Gary: and I’m Gary Baker from CANNEX. We’ll see you next time.