The Facts About DIA's
If you need a guaranteed stream of income, a deferred income annuity might be for you. You exchange some savings now for a future permanent but guaranteed income stream. The income stream would begin two to twenty years in the future.
You transfer the risk of outliving your money to the annuity company because they are contractually obligated to pay you as long as you live.
You will hear deferred income annuities referred to as DIAs and longevity annuities. DIAs, deferred income annuities, and longevity annuities refer to the same product.
DIA stands for “deferred income annuity.”
A deferred income annuity can help you cover essential expenses in retirement. Along with Social Security and pensions, they provide a guaranteed income floor.
Deferred means that you are deferring income and plan on taking it later. The older you are when income begins, the higher your payments will be.
This is because all lifetime income amounts are based on your life expectancy.
DIAs are flexible premium contracts. This means you can add money over time to the same contract. This is an excellent way to benefit from rising interest rates.
DIA Benefits
1. Simplicity - You don’t need to manage a deferred income annuity. There is nothing to do but to make sure the income keeps coming in. The products are easy to understand and don’t have any surprises. Very few confusing options.
2. Safety & Security - DIAs provide a stable lifetime income that cannot be outlived. They are fully guaranteed by the insurance company. The rise and fall of the markets do not affect the amount of income you receive.
3. No Fees Whatsoever - The income you receive is net of all fees. There are no fees to open the accounts.
4. Locking in Income - You can lock in an exact amount of retirement income years before retirement. You don’t have to wait until retirement to know what your investments might produce.
5. Efficiency - DIAs provide the most guaranteed income for the lowest investment. Most income, smallest upfront payment. DIAs beat SPIAs because you are letting your income grow before turning it on.
6. Reduce Longevity Risk - DIAs reduce the risk of outliving your savings. They provide a strong foundation for your retirement income plan.
7. Benefit From Rising Rates - Because you can add to your DIA over time, you can benefit from rising interest rates by adding more money to the contract.
The Best Fit for DIAs
DIAs make a lot of sense for someone who is between the ages of 50 and 65, still working, and doesn’t plan to retire for five to ten years.
By waiting, you have guaranteed yourself a higher pension in the future.
Do your Social Security and pension cover your essential expenses? If not, you can use a DIA to cover the gaps.
Deferred income annuities provide peace of mind. Retirees like knowing that their core expenses are covered from a guaranteed source of income.
DIAs allow you to sleep easier because you don’t have to depend on other investments to provide income.
You can invest in growth investments because you don’t have to worry about selling investments when they are down.
DIAs are a way healthy Americans can “bet on themselves.” The longer you live, the higher your returns will be.
DIA Rates
1. Your Life Expectancy - The older you are, the less time you have to live, thus, the higher the monthly income will be. The younger you are, the lower it will be. Your age matters. If you are curious, visit our life expectancy calculator.
2. Your Sex - Because women live longer than men, they receive less income. All things being equal, men receive a higher income amount.
3. Deferral Period - The longer you wait before turning on income, the more time your income has to grow. For example, if you are age 55 and turn income on at age 65, your income will be higher than if you turn income on at age 60.
4. Type of Policy - You can design the contract to be based on your life alone. This is called “single life.” Single life contracts pay the highest income. A joint life policy is based on your life and another person. These will pay less than a single life contract.
5. Inflation Protection - You can have your income increase with inflation from 1-5% per year. The higher the rate of inflation you choose, the lower the income amount. If your family has a long life expectancy, add inflation protection because you have time to make up the smaller payments.
6. Credit Rating - Generally speaking, the companies with the highest ratings, pay less. Companies with lower ratings pay slightly more.
Mortality Credits
Your income payments consist of three types of returns:
1. Your principal
2. Your interest
3. Mortality credits
When you invest in a DIA, you are investing alongside a pool of other investors. Some people will die before life expectancy. Some at life expectancy. And some will live longer than life expectancy.
As people in the pool pass, their money left in the pool is shared among the other members.
This other money is the mortality credit.
When you buy a DIA, you are betting on yourself, that you will live longer than other people your age. And the longer you live, the higher your returns will be.
DIA vs. SPIA
SPIAs and DIAs are very similar. SPIAs were the primary type of annuity sold in the United States until the 1950s.
DIAs have come on to the annuity scene in the last ten years.
The two main differences between an SPIA and a DIA are:
1. SPIAs are single premium, and DIAs are flexible premium. This means you can add additional money to the DIA contract. SPIAs only accept a single lump sum investment.
2. SPIAs turn on income in less than twelve months. DIAs are for people who want to turn on income two to twenty-plus years into the future.
DIAs allow you to invest a lower amount to achieve the same income goal due to the deferral period.
Both SPIAs and DIAs are popular with the financial press and regulators. They are not as popular with insurance agents because they pay lower commissions.
DIA vs. Index Annuity With Income Rider
Here’s something your insurance agent probably will not tell you. The guaranteed income amount from a DIA can be higher or lower than an index annuity with an income rider. Why do most agents promote the index annuity option? Agents' commissions are usually double for index annuities than or DIA's! We believe you should get quotes on both options and decide for yourself.
One of the decisions you have to make is whether to buy a DIA or an index annuity with an income rider. There are pros and cons to each option.
Pros for the DIA compared to index annuities with an income rider.
- DIAs are offered by larger and more stable insurance companies with higher ratings.
- DIAs are easier to understand than index annuities.
- DIAs don’t have as many complicated options to consider as index annuities do.
- There are no fees. Index annuities charge .5% to 1% for their income rider option
- No fees whatsoever.
Cons for the DIA compared to index annuities with an income rider:
- DIAs have less liquidity than the index annuity with income rider. You can’t surrender your contract and get your money back. You are locked into the income stream after purchase.
- DIAs are not as flexible for changing the income start date. You must decide when you want income when you set up the DIA. Not later. You can also only change it once.
- DIAs are more interest-rate sensitive than index annuities with income riders. This can be either a good or bad thing.
Pros for the index annuities with income riders (compared to the DIA):
- Index annuities with income rider are more liquid than DIAs. You can surrender your contract anytime you want. You would be subject to surrender charges during the surrender period. If you withdraw after the surrender period is over, there aren’t any charges.
- More flexibility on when to take income. Index annuities with income riders let you decide when you want to take income. Much more flexibility.
- There are more insurance companies selling index annuities with income riders because the product has been on the market for longer.
Cons for the index annuity with an income rider:
- There is an income rider fee of .5-1% per year. This comes out of your account balance and not your income amount. If you surrender the contract later, you paid fees for nothing.
- Index annuities can be complicated. They can be harder to understand.
- The insurance companies offering index annuities with income riders have lower ratings. DIA carriers have higher ratings.
Both are excellent options when used in the right situation. Very few insurance agents will tell you what we just did. You should quote both options and decide for yourself which option is best.
Funding A DIA
DIAs are flexible premium contracts. You make an initial investment and have the option of adding money to the contract in the future.
You can own a DIA in both qualified (retirement) and non-qualified accounts. A QLAC is a DIA inside of a qualified plan.
You can fund your DIA with monies from most sources, such as bank accounts, savings accounts, brokerage firms, etc.
Non-qualified accounts (taxable or non-retirement) can fund a traditional DIA. Qualified plans need to consider using a QLAC. This is because they are set up to handle the required minimum distributions.
Protecting Beneficiaries
Most of the annuities purchased provide some type of death benefit.
If you are single and want to maximize your benefit, choose a life-only annuity. Once you pass, there won’t be anything left.
If you have loved ones, then add a cash refund or period certain rider. The income would continue for a period of time, or until your initial investment is returned.
Whatever is left would go to your beneficiaries.
The cash refund option is the most popular type of death benefit.
Taxation
How payments are taxed depends if pre-tax or post-tax money was invested in the contract.
Pre-tax money is “qualified” money that is held inside of qualified retirement plans, such as a 401(k), IRA, etc. A QLAC is a qualified deferred income annuity.
Because the money inside of most qualified plans has not been taxed, you are taxed when the money comes out. This is the case for DIAs holding qualified money.
Pre-tax money not taxed yet is 100% taxable when you receive income.
Non-qualified monies have already been taxed. For example, the money you have in a savings account has already been taxed when earned.
Non-qualified DIA income is subject to an exclusion ratio. Some of what you receive is principal and some interest.
Any principal you receive is not taxable. Interest is fully taxable. This ratio should show up on your annuity quote.
Cons
1. Liquidity is the most significant negative for a DIA. You cannot surrender the contract. After purchase, you are locked into the income stream.
2. You must tell the insurance company when you want to turn on income when you set up the contract. Some policies allow you to only change this once.
3. If you die six years into a ten-year deferral and choose “life with cash refund,” your beneficiaries only get your lump sum back. Because there was no interest growth, they won’t get more than the interest back. This is not a huge deal for most.
4. Lack of Market Growth. Most DIAs offer income streams that don’t change. You can add a COLA, as discussed earlier, but this lowers your income amount. There is a trade-off. Invest in DIAs for guaranteed income, not growth. Invest in other areas for growth. But the DIA is for the guaranteed income floor.
DIA Fees
Deferred income annuities (DIA) don’t have fees. 100% of your premium goes toward your monthly income. When people say that “annuities have too many fees,” that refers to variable annuities, not DIAs.
The fees are built into the product. The insurance company factors their expenses into the guaranteed income amount. Therefore, the amount you receive is net of commissions and fees.
Fees are non-existent with DIAs. It’s hard to find negative press on DIAs. Legislation is being passed to make DIAs more available in qualified plans.
DIA Tips
1. Compare the guaranteed income amount on the DIA and index annuity with an income rider. Carefully consider both options.
2. If you need income in less than twelve months, consider an SPIA, not a DIA. They are very similar products.
3. If you have beneficiaries, make sure they are protected. Add “Life With Cash Refund” or “Life With Installment Refund” to the contract. This will protect the money from disappearing.
4. Consider the longevity in your family. If people in your family live far beyond life expectancy, a DIA would be a great fit.
5. Because the income comes in over many years, choose your company wisely. Look for a stable insurance company with a good rating that will stand the test of time.
6. If you expect to live beyond life expectancy, the COLA riders make sense.
7. The longer you defer the income, the higher the payments will be. The shorter the deferral period, the closer the income resembles an SPIA.
Deferred Income Annuity Commissions
The commissions agents receive on DIAs range from 1-4%. DIAs, SPIAs, and fixed annuities pay the lowest commissions.
Index annuities and variable annuities pay the highest commissions, normally, double- or triple-fixed annuities and SPIA or DIA.
DIA Quotes
Our annuity specialists use Cannex to shop deferred income annuity rates. Cannex is the market leader for DIA quotes.
They house the actuarial tables from the insurance companies on their servers. The quotes are guaranteed to be accurate from the insurance companies.
Around 90% of the immediate annuity market is run through the Cannex platform. And, most of the largest financial firms in the USA use Cannex.
Annuities are state-regulated. The quote is customized to find the products available in your state.
Request a quote from us, and we will customize the quote for your needs.
