Longevity Annuity vs. Indexed Annuity Income Analysis
Oct 4, 2022
Blueprint Income Team
We have recently identified parameters where certain indexed annuities with income riders generate more lifetime income than longevity annuities (a.k.a. deferred income annuities or DIAs).
- Products that offer the purest forms of guarantees are best within a well-diversified retirement strategy
- While indexed annuities are often utilized for their other properties, in today’s market, some indexed annuities do offer higher income guarantees than longevity annuities
- Policies with short deferral periods for women, men and joint offer higher income through indexed annuities than longevity annuities
We’ve written extensively about the advantages and disadvantages of different annuity products. Our philosophy at Blueprint Income is that products that offer one benefit, like income annuities, will provide superior outcomes inside a well-diversified portfolio when compared to products that offer to do many things in one, like the fixed indexed annuity (FIA). However, from time to time pricing anomalies present opportunities that could make buying an indexed annuity for its guaranteed income alone the right choice.
We have recently identified parameters where certain indexed annuities with income riders generate more lifetime income than longevity annuities (a.k.a. deferred income annuities or DIAs). The key takeaway: if you are interested in income beginning in 5-10 years, an indexed annuity with an income rider may provide more income than a longevity annuity.
Below is a quick overview of the basics of indexed annuities and key takeaways of our analysis. If you would like a more comprehensive review of your specific situation, please contact us.
In the simplest terms, indexed annuities offer growth tied to an equity index with no risk of loss. The growth of the account value is limited through caps (a maximum growth amount), spreads (a reduction from the equity index growth), and participation rates (a percentage of the equity index growth). These limits to the annuity’s growth pay for the cost of downside protection.
In addition, indexed annuities can include riders called Guaranteed Lifetime Withdrawal Benefits (GLWBs). The GLWB provides income, in the form of a withdrawal, that can be taken from the account over your lifetime. The GLWB income amount is determined by applying a stated withdrawal percentage amount to a shadow account, called the Benefit Base. The Benefit Base typically grows at a rate that is well above equity index growth, for example, 10%, for a period of 10 years. But, the stated withdrawal percentages are always lower than the annuitization rates from comparable longevity annuities.
We compared different payouts available through longevity annuities and indexed annuities across gender and deferral lengths for carriers rated A or A+. With a short deferral period (5-10 years), we found that the relatively high growth of the Benefit Base results in more income for customers, even though the withdrawal percentage is lower than the annuitization rate through a longevity annuity. Since the Benefit Base usually stops growing after 10 years, the income from a longevity annuity for longer deferral periods will always be superior to the indexed annuity.
Below, are the payout differences for female, male, and joint indexed annuities and longevity annuities. The numbers in the tables represent the % premium or discount of pre-tax income an indexed annuity offers when compared to a longevity annuity of the same rating. A positive number means that the indexed annuity provides more income, and a negative number indicates that the longevity annuity provides more income. Since we believe income annuities should only be purchased with carriers that have an A rating or above, we have only included those insurers with an A or A+ rating.
There are many things to consider when using an indexed annuity for income. A few are included below:
- If you take a withdrawal above the allowed amount with your GLWB, your income will no longer be guaranteed for life. It will terminate when you have exhausted your account value.
- Taxation: The taxation of GLWB income is different than longevity annuity income since the GLWB income is treated as withdrawals from a policy.
- The GLWB carries a rider charge, whose cost is borne by the customer and automatically deducted from the account value.
If you are considering a longevity annuity with a 5-10 year deferral, feel free to send an email to [email protected], and our team can help evaluate your options.
Blueprint Income Team
We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.