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Exchange Your Income Rider for a SPIA: Shootin' It Straight With Stan

Stan Haithcock
February 7, 2024
Exchange Your Income Rider for a SPIA: Shootin' It Straight With Stan

Welcome to Shootin' It Straight With Stan. I am your host Stan The Annuity Man, America's annuity agent, licensed in all 50 states. I am so glad you joined me on this topic, which is a good one. And it came from my good friend, John Lenz. I call him the annuity architect. If you are not familiar with John, you should be. He's one of the smartest people in the annuity room, and that is, including myself, a big statement. But I do this Fun with Annuities podcast that you can find on all major podcast platforms, and John is a frequent guest on that podcast because he's so darn smart and makes me look good. And anyone who makes me look good, I hang out with, you know what I'm saying? It's like a lead singer and a lead guitarist like Jimi Hendrix or Eddie Van Halen. That's John Lenz.

‌Now, he and I were talking the other day, and he told me about a case. I've seen these before, but it's worth us talking about, you and me, of course, exchanging your Income Rider for a SPIA, a Single Premium Immediate Annuity. That's a loaded statement. We've got to dig in a bit here because it's not easy. In other words, "I got an Income Rider; I'm just going to flip that thing to a SPIA." And you don't need an agent to do that either. It's got to work in your favor for that to happen mathematically. I'm going to go through that, but John told me about a great case that he was working on. In this case, they looked at the Income Rider, which was attached to a Variable Annuity. Income Riders can be attached to Variable Annuities or Index Annuities.

‌The Calculations

‌But an Income Rider, just to give you a glance at that and what that is from a 30,000-foot view, is an attachment to a policy, Variable Annuity or Index Annuity policy, at the time of application that guarantees a lifetime income stream. You can set up your life, joint life, etc., but it's a separate calculation from the accumulation value. I know I'm going fast; I'm going to stop. Accumulation value in real terms is the real money. In the Variable Annuity side, that's the separate accounts, you call them mutual funds, and the Indexed Annuity world, that's the caps and spreads and participation rates and that stuff, the walkaway amount. So, if you draw a line down a blank sheet of paper visually, the left-hand side is the accumulation value side. Again, for Variable Annuities, it's the mutual funds, i.e., separate accounts, and the Index Annuities; these caps, spreads, and participation are the index option side. Then the other side is the Income Rider, two separate calculations.

‌Typically, the Income Rider is higher than the accumulation value. You say, "Wait a minute. Why? Why do you say that carte blanche, Stan The Annuity Man?" Life insurance companies issue annuities, and the insurance companies want to keep your money. The income Rider is not transferable. That amount in the Income Rider side of the ledger is not transferable if you decide to transfer the money. Now, we're getting to the meat of the matter. So, how do you even determine if you can legally, morally, and ethically transfer it to an Immediate Annuity?

‌Guaranteed Contractual Numbers

‌Here's what you have to do. You have to take the accumulation value of the policy, not the Income Rider value, and you have to ask the company that you're with currently to give you two guaranteed contractual numbers. Number one, the Income Rider number of what that lifetime income stream would be, and number two, the annuitization number, the SPIA number, if you took that accumulation value and you converted it into a Single Premium Immediate Annuity and most of these policies will allow you to do that. Then, you visit The Annuity Man and schedule a call with us.

‌We'll walk you through this process and you can run a Single Premium Immediate Annuity quote using the accumulation value, the walkaway amount. Remember again, Variable Annuities are separate accounts in the mutual funds. The value in Index Annuities is the cap spreads and participation rates, index option value, that walk away amount minus surrender charges. And so, you run that number on our site, Single Premium Immediate Annuities, our calculator there and see what the number is. In this case, John told me they looked at the Income Rider number and the Single Premium Immediate Annuity Number, quoting all carriers, and beat that number using the accumulation value. That's incredible. It shouldn't happen, but it did, it was a big case, and it was in the client's favor.

‌Annuities Are Math

‌It was a huge difference between the guaranteed lifetime income rider amount that the Variable Annuity was offering and the Single Premium Immediate Annuity using the accumulation value, not the Income Rider value, to quote it. Here's what it all comes down to. Annuities are math.

‌By the way, let's talk about transfers for a second. If you have the annuity Variable or Index Annuity, the Income Rider inside an IRA, it's an IRA to IRA transfer. It's a non-taxable event. If it's in a non-IRA account, it falls under IRS Section 1035. Look it up if you're so bored. And that says you can transfer from one annuity to another, non-taxable event. So, in any case of transferring annuity to annuity, it's a non-taxable event, but it's bigger than that.

‌Side-By-Side Comparison

‌The annuity industry does not want agents and advisors out there flipping, churning, and twisting accounts, meaning they're transferring them to create a commission for the agent or advisor. Whatever you think about the annuity industry, they really do care about the consumer and they're trying to thwart. I love that word, which means stop in southern. Stop all that nonsense. So, what do they do? You say, "Wait a minute. That sounds good in principle, but what kind of policies or what kind of best practices are they putting in place?" Well, here's what they do. When you transfer from one annuity to another, it doesn't matter if it's IRA, Roth IRA, or non-IRA; the application has a side-by-side comparison of the annuity that you're coming from going into the annuity that you're going to and the annuity that you're going to have to provide, wait for it, a higher contractual guarantee. Not a hypothetical, theoretical, unicorn-shaped butterfly, but a contractual, higher contractual guarantee when you move from the old annuity to the new annuity.

‌In this case with John, he had to show the receiving annuity company that not only was the Income Rider amount not higher than the Single Premium Immediate Annuity amount using the accumulation value, but also the Single Premium Immediate Annuity quote from the old carrier wasn't as high as the SPIA quote quoting all carriers. He had to prove both of those. You say, "Wait a minute, that's a lot." It is a lot, and it should be a lot. There should be huge hoops to jump through before you decide to move from one annuity to another, knowing that the Income Rider value is not transferable and knowing that the accumulation value, if there are surrender charges, you have to factor that in. There are no games to be played. And if games are played by the agent or advisor filling out the application, that's another problem that the agent or advisor will have to deal with, and it isn't fun.

‌Lose Your License and See You Later

‌It's, "Lose your license and see you later." And it should be. It's like filling out a mortgage application fictitiously. There's no way to juice the numbers on a side-by-side contractual guaranteed comparison. "Okay, Stan, that's fantastic. I get it. So, what now?" Suppose you have an Income Rider or purchased a Variable Annuity with an Income Rider or an Index Annuity with an Income Rider. In that case, I encourage you to visit my site and schedule a call. You'll either get me or one of my smarter people on the phone, and we can do that side-by-side comparison. Spoiler alert: most, and I'd say the majority of the time, I would say over 70% of the time, with Income Riders, you're not going to be able to beat it by transferring the accumulation value, the walkway amount, the real money amount to an Immediate Annuity quoting all carries, you're just not. But you know what? Isn't it worth the exercise? Isn't it worth looking at your Income Rider that you've had in place? You've been paying fees on it every year, and you're going to pay fees on it for as long as you're breathing to make sure that you have the highest contractual guarantee. It makes sense to me. It's like having an income warranty and we are providing it at The Annuity Man for free and under no obligation. All we're going to do is run the comparison and tell you, "Hey, stay there."

‌70% of the time, it goes, "Hey, that's good. I'm glad we did this. Now you know. Stay there. Turn on the Income Rider when you need income." Period. But you might have the situation that John Lenz ran into with one of his valued clients who says, "Hey, this Income Rider's not competitive when it was written, and we can do better with a lifetime income guarantee with a Single Premium Immediate Annuity." If that's the case, that's a pretty good deal because what are you doing? Good question. Suppose you transfer from the Variable Index Annuity at the Income Rider to an Immediate Annuity after we have proven that the contractual guarantees are higher with that Single Premium Immediate Annuity. In that case, you've stripped out all those fees. I'm not saying the fees are bad for Income Riders because they don't affect the lifetime income stream. Still, you are paying a fee for the life of the policy for that Income Rider attached to Variable or Index Annuities.

‌Life With Cash Refund

‌If we can mathematically and contractually show that you'll get a better and higher payout, apples to apples, moving to an Immediate Annuity, you've also stripped out all fees. All fees. Now, Income Riders typically, 99% of the time, are what I call life with cash refund. Meaning that when you pass away, whatever's left in the accumulation value will go to your list of beneficiaries. The evil life insurance and annuity company won't keep a penny even though they're contractually on the hook to pay as long as you're breathing.

In an apples-to-apples comparison, we typically run the single premium immediate annuity life with cash refund or joint life with cash refund to mirror, in my RROR, the Income Rider that we're comparing it to.

‌I know I threw a lot at you. That was a fire hose of Annuity Man information, but very valuable to all of those Income Riders that were sold out there, and a lot of you are not sure what they are, not sure what you bought, not sure if it's good, "Why am I paying this fee?" Et cetera, et cetera, et cetera. What we want to do at the Annuity Man is clarify that so that you don't have to think about that anymore.

‌And like I said, 70% of the time, we're going to say, "You're good. Stay there. You're good. You can't beat it on the street, as they say, the Annuity Street. Stay where you are and turn on the Income Rider when you need income." But there will be situations like John Lenz ran into that we can beat the income rider using the accumulation value in a SPIA, Single Premium Immediate Annuity, quoting all carriers. How about that little nugget of wisdom? Unbelievable. From Stan, the Annuity Man, and that is Shootin' It Straight With Stan. I'm Stan The Annuity Man, America's annuity agent. I'll see you next time.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.

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