DIA vs GLWB Part II
I got a lot of questions from last week’s DIA vs GLWB episode so I want to clear those up and offer some information that was unintentionally missing from what I shared. Yes, one person brought up a couple points that highlight some key differences between guaranteed lifetime withdrawal benefits (GLWBs) and deferred income annuities (DIAs). It made me realize that I left a couple of material things out and I also need to remind everyone that one case does not make a recommendation for everyone. Your numbers will not be the same as this case or the one from last week. The point is to help everybody think a little differently.
We established last week that in certain situations, DIAs are better for a legacy. You receive less income than a GLWB because there is a better guaranteed remainder with the DIA. In that case we looked at putting a specific amount of money into a contract that would get the best combination of income and legacy. It worked out in that example because it was a single life payout scenario. Change the inputs slightly and the results could be different.
Since other people are now interested in taking this approach, I need to explain some of the structural differences between the contracts. When you take income and who is getting paid can change things considerably. GLWB contracts only have either single or joint life payments so it’s simple. DIAs also have joint or single life payments but there are lots of decisions to make in regards to what type of remainder you’d like to leave. Certain periods of any length or installment refund all offer different levels of income because risk transfer to the insurance company changes between options. With a DIA you can customize this for income and legacy. A GLWB only leaves a legacy to the extent that there is cash remaining in the account.
With a GLWB, upon purchase you do not choose whether you want single or joint life, or when you want income to start. Those elections are made on the income start date. Annuitants have to be named at purchase but you are not bound to either income option. With a DIA, the payout date has to be elected on the day it is purchased. The contract I just sold will allow the owner to change that date once during the deferral period but that’s all. You have to know exactly when income will begin. A study I read years ago discovered that most people change their income start date at least once, with most people taking income earlier than initially planned. A DIA may not offer that option. Plus death of a spouse or a divorce in the middle of a long deferral period could have you leaving money on the table. It happens.
Because the first case was all about leaving a legacy, let’s not forget that I said MOST people are trying to maximize income. If doing that I suggest getting the most efficient income stream and handle the legacy in other ways. Last week’s case dealt with a person I’ve worked with for nearly ten years so of course we already have that stuff covered.
There are two ways to look at getting income with DIAs or GLWBs. You can either try to get as much income as possible with a certain investment, or you can target a certain income amount for the least amount of money. Last week was the former and this week is the latter. Solve for income or solve for premium required.
One of the appointments I had this week was with someone who is looking for the best way to get $2000 per month, joint life in 8-10 years. Let’s look at eight years of deferral for starters and make the comparison there. This guy was interested in the same 20 years period certain from a DIA because of the combination of income and legacy. The DIA would cost $254,000 for joint life with installment refund, which guarantees his heirs will get the difference between premium and total aggregate payments if he doesn’t live long enough to collect his initial investment. That was his way of comparing apples to apples with the GLWB, which has about the same type of minimum guarantee.
The table below shows the DIA payouts and different options for legacy payments. You can see that there isn’t a huge difference between payments with any of the options so it would probably be best to choose the greatest remainder. This is all based on the owner’s age when it’s purchased. This couple is young so at least one person is actuarially likely to outlive the guaranteed payments.
Next we looked at the GLWB, for the same $2000 per month, it only required $188,000 initial investment, a savings of $66,000. Because I believe this is more of an income play then I’d recommend the GLWB. Sure the DIA has a better guaranteed remainder but saving $66K at the beginning gives him the same additional investment funds now that can grow over time to be used for any additional planning, including a legacy.
At the beginning I mentioned he was trying to decide if they would take income in either eight or ten years. The GLWB would give them the option to delay the decision until the day they decide to take income. And if something happens to either one of them then they are not locked into a past decision that would give either individual lower income.
GLWBs are for maximum income with the most optionality. DIAs work in unique situations like I shared last week. Everyone is different and this information is accurate but general in nature. Use it to think differently about planning for retirement but don’t assume your path will be the same. That’s the purpose of booking a consultation with me. Education is foremostly important so you will ultimately understand exactly which path you are taking and have full confidence in doing so.
Enjoy the weekend and get a hold of me if you’re interested.
Bryan
Podcast Episode 151: DIA vs GLWB Part II
Download Episode 151: DIA vs GLWB Part II on Apple Podcast
Last Updated on September 13, 2024 by Bryan Anderson
I’ve watched a few of your videos and like how you discuss the details of how you approach your recommendations. I’m wondering why you don’t state which specific annuity companies and products you discuss in your examples. I like to educate myself by reviewing the marketing brochures of annuity providers.
It changes all the time and when that happens, someone watching this several months from now might get stuck on a company that shouldn’t be in the conversation at that time. Strategy first, then products.