Annuity Products: SPIA is a DIA is a QLAC
The Annuity Man
Regardless of what you might believe or what most financial pundits or advisors might tell you, most annuity types are very simple and have no annual fees. That’s especially true when we are talking about lifetime income guaranteed annuity strategies.
Three of the most popular lifetime income annuity strategies have pretty much the same contractual structure. Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), and Qualified Longevity Annuity Contracts (QLACs) all work the same. So it’s truthful to say that a SPIA is a DIA is a QLAC.
Of course buying an annuity and creating a retirement income stream both require a few details that you need to know before making a buying decision.
Lifetime Income Monopoly
Annuities are the only financial product on the planet that can guarantee a lifetime income stream. In other words, the payments are coming regardless of how long you live. They were first introduced in the Roman era as a lifetime pension payment for the dutiful Roman soldiers and their families. That first Roman type annuity is today’s Single Premium Immediate Annuity (SPIA).
Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), and Qualified Longevity Annuity Contracts (QLACs) all offer the unique benefit of guaranteed lifetime income.
SPIAs were the original annuity design and income starts as soon as 30 days from the policy issue date to as far out as 1 year. DIAs are the same contractual structure as SPIAs, but DIA income can start as soon as 13 months from the policy being issued up to a deferral time period as far out as 30 to 40 years (depending on the carrier). QLACs are DIAs that can only be used in an Traditional IRA and some employer sponsored plans. QLAC income has to start by age 85, and typically can start as soon as age 72.
So when I say that SPIAs are DIAs are QLACs...it’s for real and contractual.
Life Expectancy = Income Start Date
All lifetime income payment guarantees, regardless of annuity type, are primarily priced on your life expectancy at the time the income stream starts. Interest rates play a secondary pricing role. It’s important to point out that all annuity lifetime income payments are a combination of return of principal plus interest. Yes, you are getting your money back with interest. The true benefit proposition is that even if your account balance goes to zero, the annuity company is still on the hook to pay regardless of how long you live.
It works just like your Social Security payments. The longer you wait, the higher the payments. That’s because you are older, which means there is less life expectancy. Less life expectancy means fewer projected payments, which means those payments will be higher.
Social Security is the best inflation annuity on the planet, because politicians raise the payments to appease voters. So you can’t say you “Hate All Annuities,” but love your Social Security payments. Social Security, in essence, is a government issued annuity contract.
So with SPIAs, DIAs, and QLACs, the older you are when you start the payments...the higher those payments will be.
Good-Bye Longevity Risk
Longevity risk is the fear of outliving your money. With over 10,000 baby boomers reaching retirement age every single day, it’s a demographic tidal wave of people looking for income guarantees.
Unless you work for a government entity or a well run union, your employer is probably not offering a pension plan when you retire. Most likely, you have a defined contribution plan like a 401k that is for pure accumulation and growth during your working years. Upon retirement, it’s up to you to take those assets and convert them into an income stream if long term or lifetime payments are needed.
SPIAs, DIAs, and QLACs all contractually solve for longevity risk, and you can customize the contract so that 100% of any unused money will go to the listed beneficiaries on the policy. In other words, the annuity company will not keep a penny under any circumstance...even though they are on the hook to pay regardless of how long you live.
Commodity Shopping Bonanza
SPIAs, DIAs, and QLACs all have no annual fees and no moving parts. They also have no stock market attachments and the built-in agent commissions are very low compared to annuity agent favorites...Fixed Index Annuities (FIAs) and Variable Annuities (VAs).
SPIAs, DIAs, and QLACs are fixed annuities and insurance products issued by life insurance companies. The contractual guarantees are the same regardless of what type of account is used (IRA, Roth IRA, non-IRA). QLACs can only be used in a Traditional IRA and some employer sponsored plans, but SPIAs and DIAs can be used in all account types.
All 3 types are commodity products which means that you need to find an objective annuity calculator to shop all carriers for the highest contractual guarantee for your specific situation. Quotes change every 7 to 10 days like a gallon of milk, and you can lock in a specific guarantee as you move toward the application process.
If you are thinking about adding lifetime income to your retirement plan, then you need to consider contractually guaranteed SPIAs, DIAs, and QLACs.