Income Riders vs. DIAs: Shootin' It Straight With Stan
Welcome to Shootin' It Straight with Stan. I am your host Stan, the annuity man, America's annuity agent. Licensed in all 50 beautiful states out there. Today's topic is a very, very good one. It is timely and one you need to pay attention to for sure. Income Riders versus DIAs, Deferred Income Annuities, which one is better? Now, if you go to the bad chicken dinner seminar, expensive steak dinner seminar, or shopping locally for annuities, in most cases, you're only going to be shown Income Riders attached to Indexed Annuities. Most of the time. Or Income Riders attached to Variable Annuities, but most of the time, it's Income Riders attached to Index Annuities. And what are Income Riders? They're attachments to a policy at the time of application. In other words, you can't just buy an Income Rider; it has to be attached to a policy. And typically, that's a Variable or Index Annuity.
At the time of this blog, Index Annuity Income Riders contractually offer a higher contractual guaranteed payout than variable. Nothing against variables. I don't sell those just because I don't sell anything that has the potential to go down in value. But Income Riders are monopoly money, a phantom account. All of the whistles, bells, and shiny things pitched to you, upfront bonuses and roll-up rates at eight or 9%, all of those shiny things, all of that nonsense. The only number that makes sense and that you have to focus on is the contractually guaranteed number, the payout number. Now, you can visit my site at www.stantheannuityman.com to run Income Rider quotes and read my Income Rider owner's manual. Same with Deferred Income Annuities, you can run quotes on Deferred Income Annuities and read the Deferred Income Annuity owner's manual.
The Two Questions to Ask
On my Stan the Annuity Man YouTube channel, we break down; if you go to the playlist section, we break down all of the videos on annuity types.
So, if you want to binge Income Rider videos, you can, or binge Deferred Income Annuity videos, you can. But the bottom line is one's not better than the other. You shouldn't buy one over the other, but you should shop for both. If your goal is income in the future, like income later, always ask two questions. What do you want the money to contractually do? And when do you want those contractual guarantees to start? The first, if you said, "I want income, and I want it to start in five years." Then we're going to shop for Deferred Income Annuities and Income Riders. Under the Deferred Income Annuity category are QLACs, Qualified Longevity Annuity Contracts.
How the Sausage Is Made
So, if there's IRA money there, we might shop for that as well. But Deferred Income Annuities and QLACs are one and the same from a structural standpoint. We're talking about comparing Income Riders and Deferred Income Annuities. Now, in some industries, how the sausage is made, Deferred Income Annuities are a much lower commission product for the agent than an Income Rider attached to an Indexed Annuity. Which is a problem because that's the reason everyone leads with that. Agents are going to yell at this, and that's fine, but they know I'm right.
If you're acting in the client's best interest, you're showing all types of annuities, how they work, and the contractual guarantees. Give you an example. With Income Riders, if you're using non-IRA money, the income that you're getting, say, five years from now, that's all last in, first out, gains first all taxable. With a Deferred Income Annuity non-IRA money and you're getting income down the road to start, the income is a combination of return of principal plus interest, so you're only paying taxes on the interest portion of that income stream. It might make sense that a Deferred Income Annuity is a better deal for you from a taxation standpoint. The other thing, too, is the Index Annuity, Variable Annuity, and Income Rider is a very complicated combination, very complicated. Most agents can't even explain what they're trying to sell.
They're just doing the 30,000-foot view close. But Deferred Income Annuities, you could explain to a group of second graders. It's very simple. You give the annuity company money, and you can structure it in a myriad of ways. You can structure it to where the money goes poof if you die. And you can structure it to where whatever money's left when you die goes 100% to the list of beneficiaries. It's customizable. You can do a period certain on a Deferred Income Annuity. In other words, you could defer it for three years and then have it pay for 10 or defer it for four years and have it pay for 20 or defer it for five years and have it pay for five years. With Income Riders, you can't do that. Income Riders are lifetime income products, so not one is better than the other. We use the Index Annuity as a simple delivery system for the Income Rider guarantee because I only sell contractual guarantees.
What the policy will do, not what it might do. And the might do, is the Index Annuity side. By the way, Index Annuities are CD products. They have been CD products since they were introduced in 1995. And anyone who tells you it's a market product is lying. They just don't know. They haven't done the research, and they don't look at the facts. And I understand they're showing these back-tested numbers that look fantastic, but those are also getting ready to go away. The industry is getting into trouble right now with those back-tested numbers. They never come true, but they're convincing people to buy. And then, once they buy, they realize that those unbelievable hypothetical, theoretical returns that the agent pounded the table on never happen.
Cost of Living Adjustment
Another thing about Income Riders and Deferred Income Annuities is that we talk about inflation, but neither address it properly. You can attach a Cost-of-Living Adjustment increase to a Deferred Income Annuity, but what does the annuity company do? They severely lower that payment to compensate for the Cost-of-Living Adjustment increase. Very simple. Same thing with Index Annuities. If someone says this Index Annuity increases your income every time the index goes up or something to that effect, they're not giving that away. What they're doing is they're severely lowering the payment in order to make up for that potential index increase. Just remember, if it sounds too good to be true, it is every single time.
Now, Income Riders attached to Index Annuities are flexible. There are liquidity provisions, and you can take out with some policies 7% per year and some policies 10% per year penalty-free. But understand, when you do that, you're disrupting the policy and disrupting and lowering the guarantees because you're taking money out. With Deferred Income Annuities they typically do not have liquidity provisions. But that shouldn't be an issue just because if the allocation and proportion are right, in other words, you're not putting too much money in, then it's all going to work out. In fact, with both of these products, Income Riders and Deferred Income Annuities, on my site, you can do what's called a reverse engineer quote. Meaning that, "Hey, Stan, we need $3,000 a month to start in five years." You can solve for that and use as little money as humanly possible in the Deferred Income Annuity and the Income Rider to solve for it.
So, Income Riders versus Deferred Income Annuities, a lot of the reasons that you're being shown all the time by that local person, the Indexed Annuity is because the commission built in, and all commissions are built into annuities that it's a net transaction to you. But the built-in commission is really, really high. And if they sell enough of it, they get to go to Bora Bora with their wife, husband, girlfriend, boyfriend, or whatever applies. There are incentives to selling it, and I don't like that either. I wish that would go away. On the Deferred Income Annuity side, it doesn't. It is straightforward, and the big boys play in the Deferred Income Annuity side. But right now, if you're doing contractually guaranteed quotes, Deferred Income Annuities versus Income Riders at the time of this blog, the Income Riders seem to be winning contractually. Will that change in the future? Probably. Because previously, it was the Deferred Income Annuities that changed. So, what we need to do is get you on the phone with us; let's run the quotes at my site at your leisure. No one's going to call or show up at your doorstep. Then, schedule a call with us so that we can discuss the benefits and the limitations of both strategies so you can make a good decision on what you're trying to do.
If someone's showing you just Income Riders, say, "Hey, can you show me Deferred Income Annuities?" If someone's just showing you Deferred Income Annuities, say, "Hey, I need to see Income Riders." Because there are four ways to solve what I call income later, and I'll close with this. So, if you said to me, "Hey, Stan, I want income and I want income to start in five years." Here are the four ways to solve it.
Two, we've talked about. Deferred Income Annuities and Income Riders. The third way to solve it is to buy a Multi-Year Guarantee Annuity, say a five-year Multi-Year Guarantee Annuity. And then, at the end of the five years, let's shop for the best Immediate Annuity payment and then transfer to the Immediate Annuity. And then the fourth way is don't do anything for the five years, and then at the end of the five years, when you need income, buy an Immediate Annuity. So, there's not one product that's better than the other; there's not one carrier that has the best product. There's not one carrier that has introduced some whizzbang thing that no other carrier has. These are commodity products. These are contractual guarantees. And remember, when you're looking at lifetime income, the primary pricing mechanism is your life expectancy, or if it's joint, life expectancies, interest rates play a very minor role in the pricing.
A lot of its capacity, meaning if the annuity company wants your age range in those trenches they're building, then they will raise their guarantee to attract you. Once they get a lot of you in there, they will lower the guarantees to not attract people of your age. It's that simple. That's why you must shop all carriers through our site, so you can get the highest contractual guarantee for your specific situation. So, Income Riders versus DIAs both do the same thing. They both get to income later. Contractually, they just take two different contractual paths to get there, but they're both great strategies. But not one is better than the other. My name is Stan, the Annuity Man. 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.