What is an Annuity Income Rider?

Hey there, it’s Stan The Annuity Man, America’s Annuity Agent, licensed in all 50 states. I’m so glad you joined me today. Once again, we're taking questions from people watching our YouTube videos. You can submit your questions too, and hopefully, we’ll choose yours to discuss in the future.

Today’s question comes from Eric Schubert, and I appreciate his thoughtful questions about Income Riders.

So, let's dive in. Eric asked, "What would be the purpose of a Variable or Fixed Index Annuity with no Income Rider?" Let's answer that first.

Variable Annuities vs. Fixed Index Annuities

First, I don’t sell Variable Annuities because I don’t sell products that have the potential to go down in value. No offense to the Variable Annuity side, but my approach is: you own an annuity for what it will do, not what it might do. And what it will do is the contractual guaranteed part.

If you buy a standalone Variable Annuity or a standalone Fixed Index Annuity with no Income Rider, the reason you’re doing it is for the potential unknown returns of each specific strategy. Variable Annuities have mutual funds inside them, called separate accounts, providing potential market growth. Index Annuities have an index option strategy designed to produce normal CD-type returns.

Tax Deferral and Duration

Also, with Variable Annuities and Fixed Index Annuities, you're buying for tax deferral in both IRA and non-IRA accounts. You can buy these products for specific durations, meaning there are surrender charge time periods. MYGAs (Multi-Year Guarantee Annuities) also offer tax deferral in non-IRA settings. Still, all these products are available in various durations—some as short as two years and others as long as ten years. When you work with us, I’ll give you options on the surrender charge periods that fit your needs.

What is an Income Rider?

Eric asked, "Would a Fixed Index Annuity with an Income Rider be a good hedge against inflation?" Let’s talk about Income Riders first. An Income Rider is an attached benefit to a policy. You can add them to Variable Annuities, Fixed Index Annuities, and some MYGAs to create a future lifetime income stream. You can use my Income Rider Calculator to get a quote and see those numbers.

Income Riders are typically used when you’re deferring income for three, four, five, six, or even ten years or more. The great thing about them is that they let you know, to the penny, what your income amount will be at a future date. The amount is based on your life expectancy at the time you start the payments. Interest rates play a secondary role in pricing, but life expectancy is the primary factor. Like Social Security, the older you are, the higher the payment.

Income Riders and Inflation

Now, let’s circle back to Eric’s question about inflation. Inflation is the elephant in the room right now. What can we do about it? There’s no perfect solution; just really bad sales pitches. But here’s the best way to address inflation with an Income Rider.

You can have income start at a future date, assuming that inflation will be an issue. While you can’t know exactly what inflation will be, this approach gives you a guaranteed income stream that will start when you need it. For example, if you're currently receiving $2,000 a month and want to get $2,500 in the future to account for inflation, you could wait and buy an Immediate Annuity later, or you could buy a Fixed Index Annuity with an Income Rider now and have the income rider start in the future.

Future-Proofing Your Income

To answer Eric’s question, yes, you can use a Fixed Index Annuity with an Income Rider to address inflation in the future. Is it perfect? No. Do you know exactly what inflation will be? No. But it’s a contractual way to have income starting at a future date, which is good when planning for inflation.

Costs of Income Riders

Now, Stan, you're probably thinking, "This sounds great, but what's the catch?" Well, there is a cost. Annuity companies have the big buildings for a reason—they don't give things away. As my CEO says, "They also sponsor sports stadiums." They know when we’ll die, and yes, they charge fees.

The Fee Breakdown

Let’s visualize the fee structure. Imagine drawing a line down a sheet of paper. On one side, you have the Index Option strategy, which offers normal CD-type returns. Conversely, you have the Income Rider, a fictitious account (or "monopoly money") used to calculate your future lifetime income stream.

For that guarantee, there is a fee. Typically, the average fee is around 1% with Index Annuity Income Riders. This fee is not taken out of the Income Rider side but from the Accumulation Value side (the index option side). It’s taken out for the policy's life, but this won’t reduce the income guarantee.

Should You Worry About the Fee?

Are these fees good or bad? Should you be concerned when buying an Indexed Annuity with an Income Rider? The answer is, you know the fee is coming, and it’s taken out of the Accumulation Value side. You need to be sure that when buying an Income Rider, you’re committed to turning on the income stream and transferring the risk to the annuity company. Don't just buy it because it sounds good or looks good in the sales pitch. You need to plan to turn it on and use it as part of your future retirement income strategy.

Conclusion

One of the most tragic things I see is when people buy an Income Rider but never turn it on. If you're not going to use it, don't buy it. Remember, you’re purchasing this policy for lifetime income, so make sure you turn it on when the time comes.

Thanks again to Eric Schubert for asking great questions, which I’m sure many of you have. If you have questions of your own, leave them in the comments of our YouTube videos, and maybe we’ll answer them in the future.

Thanks for joining me today. Don’t forget to subscribe to The Annuity Man YouTube Channel, and I’ll see you next time!