Don’t let the annuity world’s ‘killer app’ handcuff you
The supposed “killer app” in the annuity world is the income rider. Just about everyone who is currently selling annuities is leading with the overhyped income-rider story. It’s unfortunate and unnecessary for all of this sizzle selling because if used correctly and fully understood, these attached annuity benefits can be used efficiently for future income planning.
However, like most things in the unregulated world of annuity sales, income riders are now the impetus of most agent sales pitches. So it’s very important to know exactly how they work, and what all the contractual fuss is about.
Accumulation value is a separate calculation
Adding an income rider to a variable or indexed annuity means that the rider value is a separate calculation from the accumulation (aka: walk away) value. Visualize drawing a line down the middle of a blank sheet of paper. The left hand side is the walk away (i.e. real money) amount. For variable annuities, that is the mutual fund (aka: separate account) valuation. For indexed annuities, this is the index call option strategy. This accumulation value side is also where all of the policy fees are deducted.
The right-hand side of the ledger is the income-rider calculation. It can only be used for income, and any high-percentage growth or lock-in that is contractual only applies during the deferral period. Once you turn on the income stream from the income rider, that annual percentage growth permanently stops.
Riders make deferred annuities a commodity
The second you add an income rider to a deferred variable or indexed annuity, that policy is immediately commoditized. What that means is the contractual guarantees of the rider should be the only value you should base your buying decision on, and you should shop all income riders for the highest contractual guarantee. There is not a “best” rider. The best rider is the one that provides the highest contractual guarantee for your specific situation.
Rider growth is targeted monopoly money
Income riders can work well when you need income at a future date, and want to know exactly what that payout will contractually be. There are many types of income riders available, and in true annuity industry form, they are making them more complex and confusing.
Most riders offer a contractual percentage annual growth while you defer, with that total value available only to calculate a lifetime income stream. Some riders also offer a confinement care (not long term care) enhanced payout if you qualify, but these “doublers” (as agents like to call them) only gives your money back faster.
It’s important to remember that the income rider dollar amount can only be used for income. It cannot be accessed any other way. You can’t peel off the interest, transfer it, or get to the lump sum. Income riders are the annuity definition of monopoly money.
Riders are designed to be policy handcuffs
Even though agents will try to convince you that the accumulation value will outperform the income-rider guarantee value, it typically does not happen. In my opinion, annuity companies design these strategies so that your only option is keep the annuity. The income rider actually handcuffs you to stay in the policy because the rider valuation seems to always exceed the accumulation (i.e. walk away) value. So, if you cashed in the deferred variable or indexed annuity, or transferred it to another annuity, the accumulation value is the only dollar amount available. You would leave the rider amount on the table.
Rider shop till you drop
At the end of the annuity day, income riders are contractual guarantees for future income needs that can be attached to some deferred annuities at the time of application. There’s a ton of income riders to choose from, so don’t allow an agent or advisor to just show you their favorite one. Regardless of the sales pitch, income riders should be viewed as a commodity and analyzed for the best contractual guarantee for you specific income goals.
So shop them all. Compare the fees. Check out the issuing carrier for their claims paying ability and COMDEX Ranking. Your future guaranteed income depends on it.
Originally published by MarketWatch.com 12.30.15 – http://www.marketwatch.com/story/dont-let-the-annuity-worlds-killer-app-handcuff-you-2015-12-30