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What Is A Lifetime Income Benefit Rider

Stan Haithcock
February 10, 2022
What Is A Lifetime Income Benefit Rider

What Is a Lifetime Income Benefit Rider?

Today's topic is what a Lifetime Income Benefit Rider is? We're going to go over that guarantee for future income. You will understand how it works and if it fits what you're trying to achieve from an income later® standpoint.

Let's talk about Lifetime Income Benefit Riders; we will cover many information today, so hang in there. It's worth your time to understand how these work. We're going to talk about what they are, their structure, what they solve for, what product types they attached to at the time of application and why that makes a difference. We'll talk about the limitations and benefits of a Lifetime Income Benefit Rider. How to get a good quote, ''how to find out the best one for you.'' Then we'll look at where it fits properly and proportionally in your portfolio.

What is a Lifetime Income Benefit Rider? Here are these riders. Why even the word rider? Just think when you hear rider, it's an attachment to a policy, so you have the policy, and you're just attaching it. An income rider you can attach at the time of application. In this day and age, the primary annuities used with riders are Variable Annuities and Fixed Index annuities. If you just look at it visually and visually draw a line down the blank sheet of paper, this side is the accumulation value side. The growth side for Variable Annuities is market growth. For Fixed Index is pretty much CD growth.

On the other side of the ledger is that guaranteed income benefit rider. It's a separate calculation. Separate calculation on the accumulation, separate calculation on the income benefit rider so you'll see two different valuations when it gets your statement. The reason for that is the income benefit rider; that calculation can only be used to calculate your first payment when. You want to make the payment. And it's based on your life expectancy at that time. That's, in essence, is what a Lifetime Income Benefit Rider is.

What Do They Solve For?

Let's dive deeper into it. Let's talk about how lifetime benefit income riders work and what they solve. In essence, they solve for lifetime income in the future when you're deferring. Remember, Single Premium Immediate Annuities for income right now. Income riders attempt a variable, and Fixed Index annuities are later income. If you need income in five years or seven years, or nine years, you can shop all income riders and find out who offers the best contractual guarantee for your specific situation. By the way, that changes all the time.

It's important to understand that a Lifetime Income Benefit Rider typically has a high percentage that makes you listen. Back to those Jimmy Carter years where interest rates were so high, you get 12 percent CDs or eight percent CDs. The guy stands at the bad chicken dinner seminar and says, “I can get you an 8 percent annuity.” No, he can't, or she can't. They’re talking about an income benefit that grows by eight percent. I will stop you there because I know you salivated. That sounds good, Stan. Hold on, Sparky. It's Monopoly money. It's Monopoly money that can only be used to calculate the income when you started. It grows by eight percent for, let's say, seven years, then you start the income, eight percent goes away. Poof. Then that fee from an income rider is taken out of the accumulation value for the policy’s life. That's both good and bad.

I’ve found that a lot of the income riders attached to the Fixed Index side provide a hierarchy contractual guarantee.

At the end of the day, if you're buying a Lifetime Income Benefit Rider attached to a Variable Annuity or an Index Annuity, you're buying the guaranteed, you're buying the lifetime income, you're buying the transfer of risk, and that's where we should be basing your decision. In terms of the income riders attached to these policies, the income rider is your decision. So, if you draw a line down the middle of the page, in my opinion, you're going to buy the rider, and you're not going to give a rip about that other side. That's how I do it because I'm a contractual guarantees only person in the income rider is the contractual guarantee.


Let's talk about Lifetime Income Benefit Riders; because it's called a lifetime income benefit, the rider has some benefits and limitations. We're going to cover that as well. The benefits of these riders are that you can defer a long time out, 7, 10 plus years, in many cases. You just have to tell me exactly what you want the money to do. Remember the two questions. What do you want the contract’s money to do, and when do you want those contractual guarantees to start. If you say, you know what? March and I need income in 11 years. I will probably quote ''all Lifetime Income Benefit Riders and Deferred Income Annuities'' and see who has the highest contractual guaranteed payout. With these riders, you can do a single line for a joint life with all of them. If you die, 100 percent of the money goes to the beneficiaries. The evil annuity company doesn't keep a penny even though they're on the hook to pay you for the rest of their life.

A couple of other benefits with income riders. I'm just going to shorten it. With income riders, some of them allow the growing percentage to be used as a death benefit. This is good, especially if you're smoking 12 packs of Lund Strikes with no filters and drinking a bottle of Jack Daniels every day, and you can't qualify for life insurance. That's not bad to have a death benefit that you don't have to qualify for because income riders are guaranteed issues. You don't have to go through any medical testing.

Also, two, getting back to the health part of it. They also can solve for what's called confinement care. It's not long-term care; it’s confinement care, which means that here's my southern phrase. If you get sicker, you get your money back quicker. In essence, what they do is it grows by a percent. And let's just say you can't do two of the sixth daily functions of life, which qualifies you for long-term care. With confinement, you can't bathe yourself, you can't clothe yourself, life stinks. Let's just say that. Once you qualify for that, they're going to enhance the payout or double the payout, which means you get sick or you get your money back quicker. It's not a perfect benefit, but it does provide some type of coverage in a perfect world. And a perfect Stan The Annuity Man® world. These types of confinement care benefit riders should be used as secondary coverage, not primary coverage. But once again, if you're drinking a bottle of Jack Daniels every day, this might be your only option.


Let's talk about the limitations of income riders. A lot of it comes down to sales pitches and helping people. They are trying to sell them out there because, in essence, it's a contract. I mean, bottom line, when you get an annuity contract and read it, that's what will happen. The sales pitches are nibbling around the edges of hope and unicorns chasing the butterflies and all that nonsense. You're getting a contract, but the limitations are the fee from the income riders taken out of that accumulation for the policy’s life, which is why annuity companies had significant buildings. As it grows by a specific percentage, the other thing is increasing the fee. When you lock in that lifetime income, fees are locked in and taken out of that accumulation value for the policy’s life.

You need to know a couple of other things about income benefit riders: limitations and disadvantages, cons as they say. With variable annuity income riders, sometimes when you attach it, they limit the investment choices, the fund choices, the individual account choices. This is, I mean, this is far from the course because the annuity companies are also trying to hedge their risk.

The other thing you need to know is if you take money out of the annuity policy and have an attached benefit rider, you're also taking money out of that benefit rider, which might have negative consequences on the guarantee you initially signed up for. Because they're going to draw a line down the middle of page accumulation value, income rider value, and you take money out, they're going to take it from both sides. You’ll have less money to work with from the guarantee standpoint.


How do you structure a lifetime benefit, an income rider? Typically it could be on your life, it could be communal life, and most of them, when you die, 100 percent of any unused money goes to the list of beneficiaries. Regardless of annuity type, all lifetime income is a combination of return of principal plus interest and subtracting as you're taking money out. But suppose you die earlier in the policy, you have to understand 100 percent of that accumulation value will go to your beneficiaries if the income benefit rider is a death benefit. That will go to your beneficiaries, but the evil annuity company will not keep a penny with these income benefit riders.

About ten years ago, I had a client say, you know what, I need future income, but that might change in the future. I want to keep my powder dry. I want to make sure that I can get all my money back if I want to change my mind. What did he just describe? He described in the essence of Fixed-Index Annuity or Variable Annuity with an income rider, he wanted his cake and to eat it too. He wanted to make sure that if he didn't need the income rider in the future because I think it was a situation where an employer had a promise in 10 years, and he didn't trust him. If they don't keep that promise, they will turn on the income rider. Fortunately for him, they kept their promise, and he called me said, Hey Stan, we're not going to need that income writer, I'm just going to cash in the policy will take the accumulation value. It was a good hedge.

That's a neat way to use it because you might not need the income benefit in the future. But if you do, it's there. But if you don't, you get to cash out the money, and you can take your money with that interest from the accumulation value and do whatever you want. How do you quote these things? How do you quote income riders? Commodity quote, you quote all carriers.

I’ve found that a lot of the income riders attached to the Fixed Index side provide a hierarchy contractual guarantee. The argument, the Variable Annuity people will say, and it's a valid one, is that growth from the mutual fund separate accounts makes up for it, and in many cases, it does. But I'm contractual guarantees only. I love lifetime income. I'm only looking at the worst-case scenario. I'm going to quote it for what the contract will do, not what it might do®. The will do® is that contractual guarantee of the income rider.

Where Do They Fit?

Where do Lifetime Income Benefit Riders fit in your portfolio? Three places. Number one in the primary is income later future pension, which is a future pension guaranteed that you know what is going to be to the dollar. If you say, Stan, I need you to quote, income riders, starting in 10 years, I can tell you contractually what that's going to be, whether it's your life or joint life.

The second thing is you can use it as possibly a death benefit. Not all, but some of the income riders do double duty. They can do lifetime income, or they can be a death benefit.WeWe can filter those out and find that income rider if that’s important to yous if that’s important to you. In addition, it can provide a little coverage for confinement care for my chain smokers and heavy drinkers out there who can't qualify for life insurance or long-term care. If you get sick or get your money back quicker, remember that? Those are the three things income riders solve for, but primarily 99 percent of the time, it should be for future income.

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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