Comparing Index Annuity Income Riders and DIAs: Shootin’ It Straight With Stan (TAM Classic)

Welcome to Shooting 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 Indexed Annuity Income Riders to Deferred Income Annuities (DIAs). A common question we get is: Which one’s better? As I always say with annuities, each has its benefits and limitations. So, let's go over that.

What is a Deferred Income Annuity?

Let’s start with a Deferred Income Annuity. A Deferred Income Annuity is essentially an Immediate Annuity (Single Premium Immediate Annuity) that you defer beyond one year. The Single Premium Immediate Annuity, which is the grandfather of all annuities, was developed in Roman times. The word “annuity” comes from the Latin annua, meaning "payment." A Deferred Income Annuity is created when you answer two key questions: What do you want the money to contractually do? When do you want those contractual guarantees to start? Any annuity that begins past one year after the initial purchase is considered a Deferred Income Annuity.

The Benefits of a Deferred Income Annuity

The positive aspects of a Deferred Income Annuity are that there are no moving parts, no annual fees, and no market attachment. It’s a straightforward transfer of risk product that guarantees lifetime income. You can use it inside an IRA or a non-IRA account. It can be a Deferred Income Annuity or a Qualified Longevity Annuity Contract (QLAC) if you use IRA assets. A Deferred Income Annuity can be structured for single life or joint life, with many options available, including life with period certain, life with installment refund, or life with cash refund.

I’ve written a Deferred Income Annuity Owner’s Manual, which you can get for free. We also have the best DIA calculator on the planet, quoting all carriers. You’ll find that a Deferred Income Annuity is a rigid contract. Once you buy it, you own it and cannot easily withdraw or change the terms. If you decide that you want income starting in five years, you won’t be able to get the money back; you’ll receive it in payment form, based on the contract.

Tax Treatment of Deferred Income Annuities

The taxation of a Deferred Income Annuity depends on whether it’s in a non-IRA or IRA account. In a non-qualified account, it has an exclusion ratio, meaning that only the interest portion is taxable. If it’s in an IRA, the entire amount is taxable.

But here's a key point: once you purchase a Deferred Income Annuity, it’s a guaranteed income product, and it operates like a pension plan. For my daughters, who are in their twenties, I bought Deferred Income Annuities that start many years in the future to ensure that they have a steady income stream, even if Social Security may not be there for them.

Quality of Deferred Income Annuities

Deferred Income Annuities are offered by top-tier carriers, typically with AA-plus ratings. If you want the best quality and the most reputable carriers, the Deferred Income Annuity is the way to go.

Income Riders on Indexed Annuities

Now let’s talk about Income Riders attached to Indexed Annuities. Income Riders are added to the policy at the time of application to guarantee future income. These income riders are generally the primary reason we use Indexed Annuities—because they offer an efficient way to guarantee future income. The Income Rider operates on a separate ledger. You can’t cash it in or transfer it, but it helps determine your future lifetime income stream.

Flexibility of Indexed Annuities

The key benefit of Indexed Annuities is their flexibility. After the surrender charge period ends, you can choose to take the accumulation value (the index value) out but not the rider value. So, Indexed Annuities are pivot products—you can change your mind and take money out without losing the value of the rider.

Most Indexed Annuities allow a 10% penalty-free withdrawal annually. However, if you take money out, it will disrupt the Income Rider’s contractual guarantees. I’ve seen agents mislead people by saying you can take money out without affecting the income rider, but that’s not true.

Fees for Indexed Annuities with Income Riders

It’s also important to note that Indexed Annuities with Income Riders have a fee for the life of the policy. This fee typically ranges from 0.75% to 2%. These fees are taken out of the accumulation value, not the Income Rider side.

Deferred Income Annuity vs. Income Riders: A Side-by-Side Comparison

Let’s compare the two products:

• Fees: Deferred Income Annuities have no fees, while Indexed Annuities with Income Riders have a fee for the life of the policy, taken out of the accumulation value.
• Liquidity: Deferred Income Annuities have no liquidity—they’re designed for a long-term income stream with no access to the principal. On the other hand, Indexed Annuities with Income Riders offer more flexibility with annual withdrawals, but any withdrawals will disrupt the income rider’s guarantees.
• Tax Treatment: With a Deferred Income Annuity, you get tax preferential treatment on the income in a non-qualified account. Indexed Annuities with Income Riders follow the typical taxation rules based on the account type.
• Guarantees: The key factor to remember when choosing is which product offers the highest contractual guarantees. This is where you should focus—guarantees, not hypothetical returns or what an agent pitches.

Making the Decision: Which is Right for You?

When comparing these products, you need to run quotes for both a Deferred Income Annuity and an Indexed Annuity with an Income Rider. The first filter should be which product provides the highest contractual guarantee. Then, check the carrier’s financial strength rating (A-plus or better for lifetime income). Finally, consider whether you need flexibility and whether fees should play a role in your decision.

Final Thoughts

I always encourage you to do your due diligence before making any decisions. Go to The Annuity Man and run quotes for both types of annuities. Take your time and educate yourself with the free resources available on my site, including the Deferred Income Annuity Owner’s Manual and Income Rider Owner’s Manual. You can engage with us when you’re ready, but there’s no rush. My team and I are here to help, and we’re not high pressure.

Remember, these are contractually guaranteed products. It’s not about what they might do but what they will do. If you use the right filters—contractual guarantees, carrier ratings, flexibility, and fees—you’ll make the best decision for your income needs.

I hope this helped break things down for you. This is Shooting it Straight With Stan. My name is Stan The Annuity Man. I'll see you next time.