Annuities Deferred Income Annuities Fixed Index Annuities

Invest in DIA to Fund LTCI Premiums When Retired – Part 3 of 4

While guaranteed lifetime income is the main purpose for using a DIA strategy to fund LTCI premiums during retirement, investment value is also important.

Last week’s post discussed the first three of five differences between fixed index annuities (“FIA’s”) with income riders and deferred income annuities (“DIA’s”) that will influence which retirement income planning strategy is preferable for funding long-term care insurance (“LTCI”) premiums in a given situation. Once again, the differences are as follows:

  1. Income start state flexibility
  2. Income increase provision
  3. Income tax consequences
  4. Investment value
  5. Death benefit

This post will discuss the fourth and fifth differences. Part four will present a sample case to illustrate the use of a DIA vs. a FIA with an income rider to fund LTCI premiums during retirement.

Investment Value

Although guaranteed lifetime income is the primary purpose when using a FIA with income rider or DIA strategy for funding LTCI premiums during retirement, the presence of an investment value may be important for many people.

With traditional DIA’s, you purchase from a life insurance company the promise to pay a periodic income stream for either a term certain or lifetime, with or without inflation, beginning at a defined future date at least 13 months from the date of purchase. Although the present value of your future income stream represents an asset, you generally won’t receive an annual statement from the life insurance company showing you the value of your investment.

A FIA, on the other hand, has an “accumulation value” in addition to the right to receive income withdrawals when you purchase an optional income rider. The accumulation value is increased by initial and ongoing investments, premium bonuses if applicable, and periodic interest crediting. It’s reduced by income and other withdrawals, income rider charges, and surrender charges.

Death Benefit

There may or may not be a death benefit with both FIA’s with income riders and DIA’s. In the case of DIA’s, it’s a contractual issue vs. a function of the accumulation value in the case of a FIA.

Some DIA’s will pay a death benefit in the event that the annuitant dies prior to receiving income. If this is the case, the income payment will often be less than what it would be if there’s no death benefit.

With FIA’s, the death benefit will be equal to the greater of the minimum guaranteed value or the accumulation value. As previously stated, the accumulation value is a moving target that increases and decreases as a result of various transactions. Depending upon the amount of cumulative income and other withdrawals as well as income rider and surrender charges, there may eventually be no minimum guaranteed value or accumulation value remaining.

By Robert Klein

Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.