Annuity Income Rider: How Do They Work?
Annuity sales continue to rise every quarter in the United States, and a lot of the credit for driving this consumer popularity is the Annuity Income Rider.
So how do Annuity Income Riders work? Riders are separate benefits that you attach at the time of application. That Income Rider provides a lifetime income stream that starts at a future date of your choice. If you like your Social Security payments, then you will like your Income Rider payments. Both provide an income guarantee that you can never outlive.
If you are one of the 10,000 baby boomers that reach retirement age every single day or someone planning for that retirement finish line, then your retirement planning and financial planning goals have to include lifetime income guarantees. Let’s take a look at how Annuity Income Riders could possibly be a part of your overall plan.
Lifetime Income Matters!
The annuity product is the only financial category that can provide a contractually guaranteed lifetime income stream. It’s a monopoly that only the annuity industry can claim. Annuity contracts are issued by life insurance companies and the income guarantees provided are backed by the claims paying abilities of the issuing carrier.
There are many types of annuities that provide lifetime income. Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), and Qualified Longevity Annuity Contracts (QLACs) all offer payments that you can never outlive.
Income Riders are the other contractual offering that also provides a pension type income stream. An Income Rider is not a stand alone product. You can’t just buy an Income Rider. It has to be attached to a policy at the time of application.
To Attach or Not To Attach
The two primary deferred annuity product types that an Income Rider can be attached to are Fixed Index Annuities (FIAs) and Variable Annuities (VAs). Not all FIAs and VAs offer Income Riders, but most do. You can only add an Income Rider at the time of application, and it can’t be added after the policy has been issued. You do not have to attach an Income Rider to a policy, but most agents and advisors seem to be promoting them to a consumer base that is thirsty for more guaranteed income.
Fixed Indexed Annuities (FIAs) are currently the most popular annuity type that are sold with attached Income Riders. You can attach an Income Rider to a Variable Annuity (VA), but typically the highest contractual guarantee can be found with FIA Income Riders.
So what is a Fixed Index Annuity (FIA) with an income rider?...and what is a living benefit rider on an annuity? Let me try and paint that contractual picture for you.
If you draw a line down the middle of a blank sheet of paper, the left hand side is the accumulation part of the policy. The right hand side is the Income Rider benefit. They are two separate calculations, with the Income Rider side only available to calculate the lifetime income payment when you decide to start the income stream. If you “cash out” of the annuity, then you will receive the accumulation value of that policy. Make sense?
Annuitization vs. Withdrawal
Riders are separate benefits that you attach at the time of application.
Not all Income Riders are the same. Some require you to "annuitize" that Income Rider amount. Annuitization is creating an irrevocable income stream, just like you would with a Single Premium Immediate Annuity (SPIA). However, the vast majority of Income Riders are what’s called “withdrawal” benefits. In my simplistic world, withdrawal means subtraction...with full control over the asset. In other words, when you “annuitize,” it means the income stream is coming. It’s irrevocable. Withdrawal means that even after the income stream starts, you can change your mind and stop those payments if needed.
During the deferral years, most Income Riders have what’s called a "roll up rate." That rate is an annual percentage increase until the income stream is turned on. A roll up rate is not like normal interest rates. Roll up rates can’t be peeled off, cashed in, or transferred. They can only be used to calculate the lifetime income stream at the time you want the payments to start. The vast majority of Income Riders have nothing to do with the stock market. They are pure contractual guarantees.
So in the epic battle of a lifetime income benefit rider vs. annuitization, there is no clear winner. Both provide lifetime income. Both get you to the guaranteed income goal, but each taking a different contractual path to get you there.
Fee For Life
The majority of Income Riders that you can attach to a deferred annuity (FIA or VA) come with an annual fee for the life of the policy. As I always say, annuity companies have the big buildings for a reason. Getting a fee for life is a good thing for any business.
It’s important to point out that the Income Benefit Rider fee is taken out of the accumulation value part of the policy. It is not taken out of the Income Rider calculation benefit base. That’s key because when you add an Income Rider to a policy, you should be making your buying decision on the contractually guaranteed income that the Income Rider provides.
You will always have full control over your original investment and lump sum amount placed in the FIA or VA, but when you add the Income Rider to the policy...that should be the reason you own the annuity in my opinion.
Ride The Commodity
Annuities are commodities and should be shopped with all carriers to find the highest contractual guarantee for your specific situation. Annuity “riders for income” should be approached from a buying standpoint the exact same way. You have to shop all insurance companies that offer Income Rider contractual guarantees and use an objective Annuity Income Rider calculator to find the highest payment number available.
Once you find the highest contractual guarantees for your specific quote parameters, then you need to make sure that the financial strength of that carrier can back up those claims. I recommend looking at the COMDEX Scoring system that looks at all 4 major ratings services (A.M. Best, S&P, Moody’s, and Fitch).
So if you are looking for a future pension income stream with full control over the asset, then an Annuity Income Rider might just be a good fit for your “Income Flooring” needs.