DIA vs GLWB – Max Income or Legacy?
There are two main options for using annuities to produce deferred income and both have an advantage, depending on your goals. In most cases people are trying to maximize income so it’s an easy and objective decision to make. When legacy comes into play then things change and lots of people want a mix of benefits or taking lifetime income but also wanting to leave something behind.
Deferred Income Annuities (DIAs) are seemingly self explanatory. It’s basically an immediate annuity where the owner wishes to defer payments for more than a year. These became popular as a hedge against longevity, or insurance that pays income late in life to make sure you don’t run out of money. Then QLACs came along, or qualified longevity annuity contracts, which allows the owner to skip RMDs on a portion of IRA funds and set that money aside to protect against longevity risk. As with most assets, creative uses came about that made these contracts viable for other uses as well, namely just regular old retirement income or even legacy distributions.
Aside from when income starts, deferred income annuities are just like immediate annuities. Payments can be made for life only, which means payments are gone once every annuitant has passed away. Whether you get payments for one month or 30 years it only matters how long you live. Most people don’t like to take the risk so they add a certain period, most often in the range of ten to 20 years. In the case of life with 20 years certain, payments will be made to annuitant or beneficiaries for the life of the annuitant or 20 years, whichever time period is longer.
Guaranteed Lifetime Withdrawal Benefits (GLWBs) come attached to a fixed indexed annuity and offer some really nice guarantees. In fact, most of the time that payments are deferred for more than a year, GLWBs will pay the highest amount of income. But you can’t add the same long term guarantee of payments if you don’t live long enough to collect. You do get a residual account value that grows at some interest and is reduced by each income payment and in most but not all cases, an annual fee. With payouts incredibly high right now, cash value drains quickly so there’s not much left after 12 years or so.
GLWBs have the highest deferred income payments and have been a great deal in the past few years with people maximizing income for the least amount of cost. Not everyone, however, is foremostly concerned about maximizing income. I ran into this last week and had to be honest when I realized the DIA, with lower guaranteed income, was the better deal in a specific case. It shows a material advantage for the DIA so it’s the type of analysis that needs to be shared.
I have worked with Dan for more than eight years and he has owned pretty much every type of annuity I talk about. He did a good job of laddering different time periods of income and deferred contracts that had him going short during low interest rate periods and more recently replacing those contracts (surrender free) with longer-term guarantees at much higher rates. The portfolio of annuities he has owned worked out beautifully and I can definitely say that if there is a poster child for Annuity Straight Talk, it would be Dan.
Over the past several months he decided to take some more risk off the table and buy another income annuity. The goal this time, however, is to slowly gift the money to his kids. They stand to inherit what’s left at some determined point and he wants to have more of a hand in it and starting much sooner. This is something that I talk to people about all the time. Some people set aside assets to leave as a legacy and I always suggest doing part of it while you’re alive. That way you can see the benefit it provides and quite likely have some say in how they use it. Plus, lots of people would prefer to leave an income stream rather than a chunk of cash.
He wants to take a portion of his assets and purchase deferred income that starts just before he needs to take required minimum distributions in five years. His first thought was a DIA that paid for life with 20 years certain. That way, if he doesn’t live more than 25 years, his kids will still get the maximum guarantee. Naturally I figured the GLWB would pay more and it did. The DIA paid $3600 monthly and the GLWB a staggering $4600 per month. For anyone trying to maximize income it would be an easy choice to just take the highest payout and that’s exactly what I do most of the time.
Most agents have tunnel vision and only think about things one way and many only sell just one or two different contracts. Dan knew there had to be a catch and I was honest with him because our relationship is important to me. The DIA was guaranteed to pay for at least 20 years. The GLWB is only guaranteed to pay for as long as he lives and any remainder is purely based on performance of the contracts. Maximum payout GLWB contract are not built to grow a whole lot and high payouts drain the cash value very quickly. He would have to collect payments from the GLWB for 16 years before cash flow equals what the DIA would guarantee.
Dan would be past his mid-80s before the GLWB turned positive so he is well-advised to not take the risk. Since this is purely a legacy play then it makes more sense to go with the guaranteed payout rather than maximum income. This is exactly opposite of what I do with most people and I don’t want to scare anyone away from taking the highest income payout because it is the right thing to do in many cases, just not in this one. It may be different for you so it’s best if you seek help from someone who can see all sides.
I’m here if you need that kind of help…
Episode 150: Choosing An Annuity Case Study – Legacy vs. Income
Bryan
Last Updated on September 7, 2024 by Bryan Anderson
