Taking A Closer Look At Income Riders
What Is an Income Rider?
Income riders are attached to some policies. You should understand what they do and what they do not do.
What is an income rider? Why do they call it an income rider? Well, it rides on the policy. So, typically the two types of policies that offer income riders that you can attach at the time of application are Fixed Indexed Annuities and variable annuities. Disclaimer, I don't sell variable annuities because I don't sell anything that has a potential to go down in value because you own an annuity for what it will do, not what it might do. They will do part as the income rider.
Now, let's do a visual. If you draw a line down a blank sheet of paper, one side is the income rider calculation and the accumulation value. In English, that means the investment value with variable annuities. That's the separate account mutual funds. Indexed annuities are the call options on the index, even though indexed annuities are CB products.
So, we will focus on the income riders and how I typically sell indexed annuities, an efficient delivery system for the income rider guarantee. So, two separate calculations. So, this side, which is the accumulation value side, has no idea what that will be. With variable annuities, we don't because it's mutual funds, and with indexed annuities, we don't know because of the call ups. We just don't know it's a fixed annuity; its principle is protected.
But on the income riders' side, most income riders have a guaranteed percentage that grows during the deferral years. That's pretty cool. Now, the problem is people think it's Jimmy Carter’s yield. The point is, people, think it's Jimmy Carter’s yield because it grows by 7% or 8% on this income rider side. Stop for a second. Don't go, "Wait a minute. 7%, 8%. That sounds good." No. This side is monopoly money and a phantom account that can only be used to calculate your first-lifetime income payment, and it's going to pay for the rest of your life at that specific amount. That's the income rider. That's what an income rider does. That's a good thing.
Now, most income riders come with a fee for the policy’s life. That's why annuity companies have the big buildings for a reason, right? But that fee from the income rider side is only taken out typically, and 99% of the policies are from the accumulation value. So, you have a fee, but this is a net amount. If you’re looking for income, say in eight years; an income rider will probably be your best choice. Can you start it sooner than that? Could you start an income rider income stream immediately? Yes, you probably shouldn't, but you can. Can you start a year from now? Yes, you probably shouldn't, but you can. But the point is income riders are the attachment to a deferred policy index annuity and a variable annuity that provides the lifetime income guarantee.
Income riders when attached to those policies, they're flexible. You do not have to use the income rider. You could get to the end of the term of the annuity and say, "You know what? I don't want to do that anymore. I just want my money back." Great. Send me the money back. The income rider benefits stay on the table because the accumulation value is what you cash out, but it's flexible. You do not have to turn on the income rider.
Another thing that's kind of cool is that income riders are not annuitized products. You're not ripping the knob off of water faucet, and the water's coming, and mean the income's coming. The income rider is a contractually guaranteed lifetime income stream, but you can shut it off, or you can choose not to turn it on, or let's just say you go into the policy and say, I want the income rider and I want it to start in seven years. And we get right up to that seven-year time period. You can say, "You know what? I want to defer a couple more years." You can.
Remember, income riders and all lifetime income products are the lifetime income stream is primarily based on your life expectancy, or life expectancies, if it's joint with your spouse or partner at the time you take the payment interest rates play a secondary role. Interest rates play a secondary role.
So, income riders are kind of the new go-go product in the annuity world. They're mis-sold a lot of times because people think they're getting Jimmy Carter yield with that phantom account percentage that it's growing by. But it's a very neat way to contractually know to the penny what your lifetime income stream is going to be at the time you take the payments in the future.
Will Do, Not Might Do®
To me I live in a will do, not might do® world. Will do® the contractual guarantee, income rider's side. Might do, is the hypothetical, theoretical, back-tested, projected agent hopeful return scenario. Unicorns chasing the butterflies. When you buy an income rider attached to a variable index annuity, focus on the income rider, focus on the contractual guarantee, focus on the future lifetime income stream because that's what you're buying, and that's the benefit proposition.
Here's the other thing about income riders. Some, not all, offer confinement care or nursing home-type benefits. Agents say, "Well, you can get this and do it with long-term care." No, it's not long-term care. Long-term care is a health insurance product. It's the best long-term care coverage on the planet. If you want long-term care, then talk to me, and I'll point you to the number one long-term care guy in the country, and he can help you. But income riders offer enhanced benefits, nursing home benefits, and confinement care benefits. And there are a lot of rules attached, and we won't go through that. You should get my book, The Income Rider Owner's Manual because I go through those in detail.
But just understand this, the income rider side should primarily be used for the lifetime income. That's where you should base your decision. But if you're the person out there, that's smoking a carton of lucky strikes with no filters every day you qualify for an income rider with a confinement care benefit. Everyone qualifies. It's a guaranteed issue. That's a good thing for all of you players living hard. But it's also a good thing for people who want supplemental coverage for those types of benefits.
Never, ever, ever, replace your long-term care policy with an income rider with confinement care benefits. And if anyone ever tells you to do that because you're doing an upfront bonus, run away from that person. But if you can't qualify for long-term care coverage because you have to go through the underwriting process, smoke all those cigarettes, and drink the Jack Daniels with Coke, then that's your play. That's the only thing you have. But that shouldn't be your number one decision. I just wanted to let you know that some income riders have that. Yes, it's an added benefit; it’s a guaranteed issue. Don't put a lot of your decision-making into that one thing; base it primarily on the lifetime income stream.
So, when you buy a lifetime income stream, I'm going to encourage you to use the income rider just to buy the highest contractual income stream, knowing it's going to be static and also knowing that you already own the best inflation annuity on the planet and it's called social security.
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.