Annuities Explained: SPIA, DIA, and RILA
Annuities are insurance contracts that convert a lump sum into guaranteed income payments. Different types serve different purposes in retirement planning. This guide covers three common types: Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), and Registered Index-Linked Annuities (RILAs).
Single Premium Immediate Annuity (SPIA)
A SPIA converts a lump sum into immediate income payments that begin within one year of purchase. The insurance company guarantees payments for life or a specified period, regardless of how long you live or what happens in the markets.
How SPIAs Work
- You pay a single premium to an insurance company
- Payments begin within 30 days to 12 months
- Payment amount is fixed at purchase
- Payments continue for life or a chosen period
SPIA Payout Options
| Payout Type | Description | Payment Level | Risk |
|---|---|---|---|
| Life Only | Payments until death | Highest | No payments to heirs |
| Life with Period Certain | Life payments, minimum 10-20 years guaranteed | Moderate | Heirs receive remainder if early death |
| Joint Life | Payments until second spouse dies | Lower | Both spouses covered |
| Joint with Period Certain | Joint life + minimum guarantee | Lowest | Maximum protection |
Current SPIA Payout Rates (Approximate, December 2024)
Rates vary by insurance company, state, and specific terms. These are representative examples for life-only payouts:
| Age at Purchase | Male | Female | Joint (same age) |
|---|---|---|---|
| 60 | 5.8% | 5.5% | 5.0% |
| 65 | 6.5% | 6.1% | 5.6% |
| 70 | 7.4% | 7.0% | 6.4% |
| 75 | 8.6% | 8.1% | 7.4% |
Reading the table: A 65-year-old male purchasing a $200,000 SPIA at a 6.5% payout rate would receive $13,000 per year ($1,083 per month) for life.
SPIA Advantages
- Guaranteed lifetime income regardless of market conditions
- Simple structure with predictable payments
- No investment decisions required
- Higher payout rates than typical safe withdrawal rates
- Removes longevity risk (outliving your money)
SPIA Disadvantages
- Loss of principal access (money is irrevocable)
- No inflation adjustment unless you pay for a rider
- Fixed payments lose purchasing power over time
- No upside if markets perform well
- Life-only option provides nothing to heirs
Deferred Income Annuity (DIA)
A DIA works like a SPIA but with a delay. You pay now, and income payments begin at a future date you specify (typically 5-20 years later). This delay allows for higher payout rates because the insurance company has more time to invest your premium.
How DIAs Work
- You pay a lump sum premium today
- You choose a future start date for payments
- Money grows during the deferral period
- Payments begin at the selected date and continue for life
DIA vs. SPIA Comparison
| Feature | SPIA | DIA |
|---|---|---|
| Income start | Within 1 year | 2-40 years later |
| Payout rate | Lower | Higher (due to deferral) |
| Purpose | Immediate income need | Future income planning |
| Premium required for same income | Higher | Lower |
DIA Payout Rate Example
A 55-year-old purchasing a DIA to begin at age 70 (15-year deferral):
| Premium | Monthly Payment at 70 | Annual Payment | Effective Payout Rate |
|---|---|---|---|
| $100,000 | $1,100 | $13,200 | 13.2% of original premium |
The 13.2% payout rate is much higher than a SPIA because:
- 15 years of deferred growth
- Mortality credits (some purchasers die before payments begin)
- Longer period for insurance company to invest
When DIAs Make Sense
- You have other income sources for early retirement
- You want to guarantee income starting at a specific future age
- You're concerned about outliving your assets in late retirement
- You can afford to lock up funds for an extended period
Registered Index-Linked Annuity (RILA)
RILAs, sometimes called buffered annuities or structured annuities, offer a middle ground between fixed and variable annuities. They provide some market upside while protecting against a portion of market losses.
How RILAs Work
- Your returns are linked to a market index (like the S&P 500)
- The insurance company provides downside protection (buffer or floor)
- In exchange for protection, your upside is limited (cap or participation rate)
- At the end of each term (typically 1, 3, or 6 years), gains and losses are calculated
RILA Protection Strategies
| Strategy | How It Works | Example |
|---|---|---|
| Buffer | Insurance absorbs first X% of losses | 10% buffer: Index loses 15%, you lose 5% |
| Floor | You can't lose more than X% | 10% floor: Index loses 25%, you lose 10% |
| Cap | Maximum gain you can receive | 12% cap: Index gains 20%, you receive 12% |
| Participation Rate | Percentage of gains you receive | 80% participation: Index gains 15%, you receive 12% |
RILA Outcome Examples (10% Buffer, 12% Cap)
| Index Return | Your Return | Explanation |
|---|---|---|
| +20% | +12% | Capped at maximum |
| +12% | +12% | At the cap |
| +8% | +8% | Full participation below cap |
| 0% | 0% | No change |
| -8% | 0% | Loss absorbed by buffer |
| -10% | 0% | Loss fully absorbed by buffer |
| -15% | -5% | Buffer absorbs first 10%, you absorb 5% |
| -30% | -20% | Buffer absorbs first 10%, you absorb 20% |
RILA Advantages
- Downside protection without giving up all upside
- No immediate annuitization required
- Can access funds (with possible surrender charges)
- Tax deferral on gains
- More growth potential than fixed annuities
RILA Disadvantages
- Upside is capped or limited
- Surrender charges typically last 5-7 years
- Returns depend on index performance
- Complex structure can be confusing
- Higher fees than index funds
Fees and Surrender Charges Comparison
| Annuity Type | Typical Annual Fees | Surrender Period | Early Withdrawal Penalty |
|---|---|---|---|
| SPIA | 0% (built into payout rate) | N/A (irrevocable) | No access to principal |
| DIA | 0% (built into payout rate) | Until income start | Return of premium (some contracts) |
| RILA | 0-1.25% | 5-7 years | 6-8% declining annually |
Understanding SPIA/DIA pricing: These annuities don't list separate fees. Instead, the insurance company's costs and profit are embedded in the payout rate. A higher payout rate from one company versus another usually means better value.
RILA Surrender Charge Example
| Year | Typical Surrender Charge |
|---|---|
| 1 | 8% |
| 2 | 7% |
| 3 | 6% |
| 4 | 5% |
| 5 | 4% |
| 6 | 2% |
| 7+ | 0% |
Most RILAs allow 10% annual withdrawals without surrender charges.
Worked Example: $200,000 SPIA at Age 65
The Situation
Robert and Linda, both 65, are retiring with:
- Social Security: $42,000/year combined
- 401(k) and IRA: $800,000
- Annual spending need: $75,000
- Income gap: $33,000/year
They're concerned about market volatility and want guaranteed income to cover essential expenses.
SPIA Purchase Analysis
Step 1: Determine income need Essential expenses (housing, food, healthcare, utilities): $60,000/year Social Security covers: $42,000/year Gap for essential expenses: $18,000/year
Step 2: Calculate premium needed Using a joint-life payout rate of 5.6% (from earlier table): $18,000 ÷ 0.056 = $321,429 needed for $18,000/year
This is more than they want to commit. They decide to purchase $200,000 SPIA instead.
Step 3: Calculate SPIA income $200,000 × 0.056 = $11,200/year ($933/month)
Post-Purchase Income Structure
| Income Source | Annual Amount | Type |
|---|---|---|
| Social Security | $42,000 | Guaranteed |
| SPIA | $11,200 | Guaranteed |
| Total Guaranteed | $53,200 | |
| Remaining portfolio | $600,000 | Variable |
| Portfolio withdrawal (4%) | $24,000 | Variable |
| Total Income | $77,200 |
Benefits of This Approach
-
Essential expenses covered: The $53,200 guaranteed income covers most essential expenses, reducing stress during market downturns.
-
Reduced sequence risk: With guaranteed income covering basics, Robert and Linda can be more flexible with portfolio withdrawals during bad markets.
-
Portfolio longevity: The remaining $600,000 portfolio only needs to produce $21,800/year (spending need minus guaranteed income), a 3.6% withdrawal rate.
Alternative: DIA for Later
Instead of a full SPIA now, Robert and Linda could split their annuity purchase:
| Purchase | Premium | Income | Start Date |
|---|---|---|---|
| SPIA now | $100,000 | $5,600/year | Immediately |
| DIA | $100,000 | $13,000/year | Age 80 |
This provides some immediate guaranteed income while ensuring higher income later when they may face higher healthcare costs or reduced ability to manage investments.
Choosing the Right Annuity
| Your Situation | Consider |
|---|---|
| Need income now, want simplicity | SPIA |
| Have income now, worried about later years | DIA |
| Want market participation with downside protection | RILA |
| Want to guarantee essential expenses only | SPIA for portion of portfolio |
| Concerned about inflation | SPIA with inflation rider or RILA |
| Want to leave assets to heirs | Avoid life-only SPIA |
Questions to Ask Before Purchasing
For any annuity:
- What is the financial strength rating of the insurance company?
- What are the total fees (explicit and embedded)?
- What happens if I need to access funds early?
- How does the payout compare to competitors?
- Is there a free-look period to cancel?
For RILAs specifically:
- What is the cap and/or participation rate?
- What is the buffer or floor protection level?
- How long is the surrender period?
- Which index is used for calculating returns?
Annuity Evaluation Checklist
- Identify your specific goal (immediate income, future income, or growth with protection)
- Calculate how much guaranteed income you need beyond Social Security and pensions
- Compare quotes from at least 3-4 insurance companies
- Verify insurance company ratings (A.M. Best, S&P, Moody's) are A or better
- Understand all fees, including surrender charges
- Review payout options (life only vs. period certain vs. joint)
- Consider inflation impact on fixed payments
- Determine what portion of portfolio you're comfortable making irrevocable
- Review the contract's free-look period (typically 10-30 days to cancel)
- Consult with a fee-only financial advisor (not commission-based)
- Keep annuity purchases within state guaranty association limits ($250,000 typical)
- Document your decision rationale for future reference