Comparing Index Annuity Income Riders and DIAs: Shootin’ It Straight With Stan

Welcome to Shootin' It Straight With Stan. I'm your host, Stan The Annuity Man, America's annuity agent, licensed in all 50 states. Today's topic compares Fixed Index Annuity Income Riders to Deferred Income Annuities, DIAs. And we get this a lot from a questioning standpoint, "Which one's better?" As I always say with annuities in general, I don't care what type you're talking about; each and every one has its benefits and limitations, good and bad. So, let's go over that.

Deferred Income Annuities

Let's start with a Deferred Income Annuity first. A Deferred Income Annuity is nothing more than an Immediate Annuity, a Single Premium Immediate Annuity, that you defer past one year. With a Single Premium Immediate Annuity, the grandfather of all annuities developed in Roman times, the word annuity comes from. ANNUA means payment in Latin, Deferred Income Annuities is when you ask the two questions, "What do you want the money to contractually do? When do you want those contractual guarantees to start?" Anything past a year, an Immediate Annuity magically turns into a Deferred Income Annuity.

The positive aspect of the Deferred Income Annuity is that there are no moving parts. There are no annual fees. There's no market attachment. It is a straight transfer of risk product for lifetime income. You can use it inside of an IRA. It can either be a DIA or a QLAC, which is a Deferred Income Annuity that you use inside of an IRA. We won't go down that rabbit hole, but a Deferred Income Annuity can be used in Roth IRAs, non-IRAs, IRAs, etc. So, it doesn't matter which one. The income coming and derived from the Deferred Income Annuity will be taxed based on what type of account you have it in.

But let's look at it from a contractual guarantee standpoint. It is a stripped-down transfer risk pension product. You can structure it as your life only or as a joint life. You can structure it just a period certain or a combination. You could do life with an installment refund or life with cash refund, life with period certain or joint life, or all of those above. There's 40+ ways to structure it. If you visit The Annuity Man, you can run DIA quotes all day. We have the best DIA calculator on the planet, quoting all carriers. It is a rigid contract. So, when you buy a Deferred Income Annuity, you have ripped the knob off the water faucet. You own it. In other words, if we ask the question, "What do you want the money to contractually do? And when do you want those contractual guarantees to start?" and you say, "I need it to start past one year," we're going to quote Deferred Income Annuities.

From a non-IRA standpoint, the income has what's called an exclusion ratio. It's a combination of return of principal plus interest. If you're getting your principal, you're not paying taxes on it in a non-qualified account. However, in an IRA account, it's all taxable. But getting back to the liquidity part and ripping the knob off the faucet, let's say you wanted the income to start in five years, you can't get your money back. There's no, "Well, I don't want to do that anymore. Send me my money." You're going to get it, but it's going to be in payment form. But again, there are 40 ways to structure it: life only, life with a period certain, life with installment refund, and life with cash refund. We will explain all of that to you. I've written a Deferred Income Annuity Owner's Manual you can get for free. We've made tons of videos about it. But just think of this. It's an efficient, no-cost, no-fee transfer of risk pension that you can defer one year out to 40 years.

Now you say, "Wait a minute, Stan. Why would you do 40 years?" For my daughters, who are in their 20s. They have Deferred Income Annuities that I've purchased for them that start way in the future because I'm not sure Social Security will be there for them, plus I want them to have a pension. And even if they like me or don't like me, that money will hit every month, and they can just cuss me out as the money hits their bank account. So, Deferred Income Annuities are a great product.

The other thing you need to know about it is the big boys play there, the big carriers. I'm not going to name the names, but you know who they are, the AA+. They offer Deferred Income Annuities. If quality is what you really want, if you really want the top tier type A++ carriers, Deferred Income Annuities is where you're going to land.

Income Riders

Let's talk about Income Riders attached to Indexed Annuities. Income Riders ride on top of the policy. You don't have to put it on an Indexed Annuity, but at the time of the application, you can choose to attach an Income Riders for future income needs. At the time of this blog, that's the only way 99% of the time we're using Indexed Annuities. We're using it as a cost-effective and efficient delivery system for that Income Riders guarantee. The Income Riders have a separate ledger. It's monopoly money. In other words, you can't cash it in or transfer it, but you can use it to determine your lifetime income stream. That's a good thing.

It's a flexible contract, meaning that you could get to the end of the surrender charge time period and say, "Send me all the money back from the accumulation value," the index value, not the rider value. It's a pivot product. Also, with Indexed Annuities, most, not all, allow a 10% free withdrawal of your money annually. But understand that if you do that, you're going to disrupt the contractual guarantees of the Income Rider. You just can't take 10% out of the accumulation value and not disrupt the Income Rider. I know that's being said out there occasionally. I just think that agents really don't know what they're doing, but if you take money out, it will affect the Income Rider guarantee, but it does have liquidity.

Lastly, the Income Rider attached to the Indexed Annuity has a fee for the policy's life. And typically, it depends. There are so many different ones out there. It can range from three-quarters of a percent up to 1.5%, 2%. That's something that you need to look at, and we will help you with it during your due diligence process.

The Fees

Let's look at the fees on it. So, an Indexed Annuity with an Income Rider has a fee for the life of the policy. That fee is not taken out of the income side. It's taken out of the accumulation value side. I know I'm throwing a lot at you. You might want to read this a couple of times. The Deferred Income Annuity has no fees, period. End of story. From a flexibility standpoint, the Indexed Annuity, the Income Rider is flexible. A couple of flexibility points: You can typically take out 10% annually with most Indexed Annuities, but not all. However, it will disrupt the Income Rider because you're taking money out of the policy. The Deferred Income Annuity has no liquidity, none. You've ripped the knob off the water faucet, period.

Taxation

I don't do taxes from a taxation standpoint because I'm not a CFP or a tax lawyer. Still, just a basic 30,000-foot view, with a Deferred Income Annuity in a non-IRA account, there will be some tax preferential treatment of that income because, remember, it's the return of principal plus interest, so you're only paying the interest portion. When you run the quotes at The Annuity Man with DIAs, you'll see that if you put in non-qualified with the Income Riders last in, first out. I'm not sure that's a reason to buy DIAs, but for some people, it is.

Comparing

But I think that when comparing, you have to compare them. You need to quote both. We'll quote you both if you engage us and schedule a time at The Annuity Man. Not one's better than the other. The first filter should be which one provides the highest contractual guaranteed number, period. Well, that's where we are with all of this. You own annuity for what it will do, not what it might do. When you look at contractual guarantees of the policy, you've commoditized the product, you shop all carriers for that. That's the first thing.

The second thing is the carrier's Claim Paying Ability. For lifetime income, I have a rule. My team follows it. A+ or better for lifetime income. It's got to be rated A+ or better for lifetime income. And so, could there be exceptions? Maybe, but they better run it by me. But A+ or better, you don't need a sweater. How about that? Those are the first two things that you look at.

And then the third thing is the flexibility. Do you need potential flexibility for that money? Some people don't. Some people want to go with those blue-blood companies that offer Deferred Income Annuities. And I think the fourth thing to consider are fees. I don't think fees should play into it. Number one, Deferred Income Annuities don't have fees. And number two, the fees coming from the Income Rider are taken out of the accumulation value, so it doesn't disrupt the guarantee of the income rider payment. Let's go over that again.

When you're comparing them, you can do it yourself. You can engage us and set an appointment, or you can run the quotes yourself, run Income Rider quotes, or run Deferred Income Annuity quotes. First filter, who provides the highest contractual guarantee. Not the potential hypothetical theory. We don't do any of that. It's who provides the highest contractual guarantee. Who's got the A+ or better? You have to look at the ratings. Then you look at flexibility, whether you need it or not or potentially need it or not. Those are the three. And then fees, which I don't think should even play in it, but those are the four things.

Then, I would read my Income Rider book. I would read my Deferred Income Annuity Owner's Manual. You can download those for free. I would pull up the specific videos on those two products I've done. I'd have a conversation with us and my team. They're not high-pressure. You're going to make your decision on your terms and your timeframe, but in essence, what you're putting in is part of your income floor that's going to combine with Social Security and a pension if you're so fortunate or whatever income-producing items are hitting that bank account every single month. And there might be. It's not an and/or. You could want half in a DIA and half in an Income Rider and hedge your bet, but it depends on who provides the highest contractual guarantee and if it's A+ or better. And if it's a substantial difference, there's no need to split it, period. Remember, they're contractual guarantees. You own them for what they will do, not what they might do.

Once again, I encourage you to dig deep. Go to The Annuity Man. I have the books Deferred Income Annuity Owner's Manual and Income Rider Owner's Manual. You can do DIA calculators until the cows come home, as they say in the South. You can use our Income Rider calculators until the cows come home. We provide all of that for free under no obligation. No one's going to call or show up at your doorstep. Then, you can engage with us and set an appointment. We would love to have you as a client but take your time. Don't fall for sales pitches. These are contractually guaranteed commodity products. There's not one that's better than the other. And if you use those four filters, you're going to make a good decision. I hope that helped. I tried to break it down simply like I do. And that's Shootin' It Straight With Stan. My name is Stan the Annuity Man. I'll see you next time.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.