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Index Annuity Riders vs. DIAs: Which Is Better for Future Income?
Hi there, Stan The Annuity Man, America's annuity agent licensed in all 50 states. Today's topic is a very good one, so lean in and listen. The topic is Index Annuity Income Riders versus Deferred Income Annuities, which are called DIAs. So, Index Annuity Income Riders versus DIAs. Which one is better for future income when you need income to start in the future? That is a very good question. I'm glad you asked it, and I'm glad I'm getting ready to hammer the answer factually. So, let's talk about how we do things at The Annuity Man.
The PILL
If you go to The Annuity Man and schedule a call, we will ask you two questions. What do you want the money to contractually do? And when do you want those contractual guarantees to start? We have an acronym called PILL. That's what annuities solve for contractually. P stands for principal protection. I stands for income for life. L stands for legacy. The other L stands for long-term care/confinement care.
So, in this case, we're looking at income for life. If you answered, I want lifetime income, either joint or single life, and I need it to start in three years, five years, or seven years. I want to use IRA money or non-IRA money, but I'm not sure. You can use a Roth if you want to, but in the perfect world that I live in with six-pack abdomen muscles that I don't have, but I wish I did, a Roth IRA should be used for real growth products. And when I say real growth, once I put real in front of growth, it eliminates all annuity types regardless of what your agent locally has told you. Which should you buy, the Income Rider attached to an Index Annuity or a Deferred Income Annuity?
Positives and Negatives
Let's go through both. Let's go through the positives and negatives and there's no bad decision. The first thing I would tell you is to quote both, and we'll do that for you if you want to, or you can go to The Annuity Man and do it yourself 24/7/365, the best calculators on the planet. I would go with the highest number, the highest contractual guaranteed number, but I say that with a caveat because I'm going to explain both products.
Index Annuity with the Income Rider
Let's do the Index Annuity with the Income Rider. An Index Annuity is a Fixed Annuity. It was introduced in 1995 to compete with CDs. It is not a market product. It is not a security. It will not get you market returns. I don't care what anybody says to you, shows you, or promises you at the bad chicken dinner seminar. I don't care. That's not what they were designed for.
Index Annuities were designed to protect the principal and get you CD-type returns, maybe a little bit better if it all worked out. And those accumulation value lock-ins have three levers to limit the upside: cap spreads and participation rates. We're not going to go into that because that's not how we use them at The Annuity Man. We use Index Annuities primarily as an efficient and cost-effective delivery system for the Income Rider guarantee, which is the future income stream. So, when you go to The Annuity Man, you can run Income Rider quotes.
In other words, we're running just the Income Rider. We're not talking about the index. We're not talking about the accumulation value. We're not talking about cash spreads and participation rates. We're definitely not talking about upfront bonuses, which is candy for the stupid. Remember, there's a hundred pennies in the dollar. When we quote Income Riders, we're quoting ones with or without the bonus. It doesn't matter. We're quoting for the highest number.
It's Flexible
The good news about Income Riders is that it's flexible. If you said, okay, Stan, I want to turn on income in 10 years. I want to set it up as a single life, or you can set it up as a joint life, either way. But at the end of the 10 years, you might say, you know what? Things have changed. I don't want to do that. I got this Index Annuity that's underlying to what the rider's attached to. Just send me all the money back from whatever it's grown by on the Index Annuity. You can do that. It's flexible.
The Fees
Now, riders attached to Index Annuities have fees. Typically, those fees can range anywhere from three-quarters of a percentage point up to 1.5% annually for the life of the policy, and that fee is taken out of the accumulation value. So, when you see the Income Rider quote, that's a net amount. That's what's going to happen. So, Index Annuities is a flexible future income. Flexible meaning if you decide to pivot out of it after the surrender charge of the Index Annuity and get your money back, whatever it's grown by, and typically it's a CD type rate.
Deferred Income Annuities
Deferred Income Annuities are the uncle of an Immediate Annuity. Immediate Annuities and Deferred Income Annuities, DIAs are the same structure. There are no moving parts, no annual fees, and no market attachments. It's a straight transfer risk pension that can be used in IRAs, Roth IRAs, and non-IRAs. The difference between a Deferred Income Annuity and an Index Annuity with a rider in a non-IRA account is that the Deferred Income Annuity will have some tax preferential treatment of the income because the income is a combination of return of principal plus interest. So, in a non-IRA account, you're only paying taxes on the interest.
Now, the downside to a Deferred Income Annuity is rigid. I mean, think about the water faucet in the back of your house as a kid. If you rip the knob off that water faucet, water's flowing, period. With Deferred Income Annuities, it's a rigid contract. There are no annual fees or liquidity, and you can't pivot out of it.
So, if you said, okay Stan, apples to apples. Income Riders attached to Index Annuities or Deferred Income Annuities, which one should I choose? We're going to ask if you need it to be flexible. Is there a possibility down the road that you aren't going to need this and just want to get money back, etc.? Then choose the Index Annuity with the Income Rider. If you say, no, I don't want to pay fees. I know this is going to happen. I want to lock it in, and then a Deferred Income Annuity would work.
Doing a Combination
The other thing you could do is do a combination. Let's say you said, okay, I'm going to put $200,000 in it, and let's just say they were both close in the quotes, do $100k in one and $100k in the other. There's no one-size-fits-all. I will tell you that even though commissions are built into all annuity types, the Index Annuity will typically have a higher commission than a Deferred Income Annuity. You don't ever see it. You should be looking at the contractual guarantees of the policy, but that's the difference between the two. One's not better than the other. You should quote them both for lifetime income and if you're using IRA money, a Deferred Income Annuity can then turn into what's called a Qualified Longevity Annuity Contract, which is a Deferred Income Annuity used inside of an IRA that has some preferential treatment because the IRS and the Department of the Treasury came out with that product in 2014.
Lifetime Income Streams
A couple more things about Index Annuities with Income Riders versus Deferred Income Annuities, DIAs. Both are going to pay for as long as you're breathing. Both are lifetime income streams. Both are transfer of risk that you're transferring the risk to the annuity company to pay as long as you're breathing. Both are going to subtract the income you're receiving, will subtract from the total, and if you outlive your life expectancy, you could get to the point where you're at zero in your account, but the annuity company is still going to pay as long as you're breathing and/or on a ventilator. You can't run return on investment numbers. I always tell people, there's no ROI until you die. Up until that point, it's a pure transfer of risk that it's going to pay. It's a pension. So, both of these are pension products. Both of these are used for income starting later, which we call income later.
If you answer, what do you want the money to contractually do? I need income. When do you want it to start? Five years, seven years, 10 years, whatever. That's when we quote both, and then you get on the line with my team, and we explain the good, the bad, the benefits, and the limitations. There's not a perfect annuity product, but just walk away with this, Index Annuity, flexible. You can get out at the end of the surrender charge time period of the underlying Index Annuity and get your money back, but it does have fees for the life of the policy. A Deferred Income Annuity is very, very simple and easy to understand. You could explain it to a nine-year-old, no offense to nine-year-olds, but it's rigid and there's no liquidity. But both provide lifetime income and both will pay as long as you are breathing.
I encourage you to go to The Annuity Man. I've written annuity owner's manuals on both products, Income Riders, and Deferred Income Annuities. I've also written one on Fixed Index Annuities if you want to understand the underlying product that's delivering the Income Rider guarantee. I've also done hundreds of videos on both of these topics if you want to dig in even further. You can run quotes 24/7/365 without anyone showing up at your doorstep and bothering and calling you. We do not do that. We wait for you to engage with us. With that being said, my name is Stan The Annuity Man and 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.