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Why You Should Take A Closer Look At Income Riders

Stan Haithcock
January 31, 2022
Why You Should Take A Closer Look At Income Riders

What Is an Income Rider?

Why should you take a closer look at income riders? Income riders are attachments to some policies. Just hang in there with me; this is important. You're going to hear about income riders, and by the end, you should understand what they do and what they do not do.

Let's get down and dirty into an income rider. What is an income rider? Why do they call it an income rider? Well, it rides on the policy. Typically, the two types of policies that offer income riders that you can attach at the time of application are Fixed Index Annuities and Variable Annuities. Disclaimer, I don't sell Variable Annuities because I don't sell anything that has the potential to go down in value. Because you own an annuity for what it will do, not what it might do® and the will do part is 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 this side over here is the accumulation value. In English, that means the investment value with Variable Annuities. That's the separate account mutual funds. Index annuity that's the call option on the index. We’re going to focus on the income riders in the way that I typically sell index annuities, an efficient delivery system for the income rider guarantee. Two separate calculations. This site, which is the accumulation value, has no idea what that will be. We don’t come with Variable Annuities because there are mutual funds, and with index annuities, we don't know because of the columns. We just don't know. It's a Fixed Annuity that is principle protected. But on the income rider side, most income riders have a guaranteed percentage that grows during the deferral years. That's pretty cool.

The problem is, people think it's Jimmy Carter yield. The point is, people think it's Jimmy Carter yield because it’s growing by seven percent or eight percent on this income rider side. Stop for a second. Don't go. Wait a minute, seven to eight percent? That sounds good. No, stop. 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.

The income rider is a contractually guaranteed lifetime income stream.

Are There Fees?

Now, most income riders come with a fee for the policy’s life. That's why these annuity companies have big buildings for a reason. But that fee from the income rider side is only taken out typically and 99 percent of the policies, from the accumulation value, so you have a fee, but this is a net amount. If you came to me and said, "Stan, the Annuity Man®, America's annuity agent®, I'm looking for income, say in eight years." Then an income rider is probably going to be your best choice. Can you start it sooner than it? Could you start an income rider income stream immediately? Yes. You probably shouldn't, but you can. Can you start it a year from now? Yes. You probably shouldn't, but you can. But the point is the income riders are the attachment to a deferred policy, index annuity, and Variable Annuity that provides the lifetime income guarantee.


I think that's a good thing and here's the reason. 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 annuity term 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. Nothing cool. I've never seen it happen too many times, a couple of times, but certain situations. You can shut this on and off with the majority of income riders. Income riders are not annuitized products. You're not ripping the nob off of waterfalls, and the water is coming to me, and the income's coming.

The income rider is a contractually guaranteed lifetime income stream. Still, you can't shut it off or you can choose not to turn it on or let's just say you go into the policy and you say, I want the income rider, and I want it to start in seven years, and we get right up to those seven years, you can say, you know what? I want to defer it to 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. Interest rates play a secondary role when you make the payment because interest rates play a secondary role. I'm saying that because the rates are low. It's about life expectancy at the time you make the payment.

Down to the Penny

Income riders, I think, are the new go-go product in the annuity world. They're often mis-sold because people think they're getting Jimmy Carter yield with that growing phantom account percentage. Still, it’s an elegant way to contractually know to the penny what your lifetime income stream will be when you make the payments in the future. To me, I live in a will do not might do world. Will do the contractual guarantee, income rider side. Might do is the hypothetical, theoretical, back-tested projected, agent hopeful return scenario, wait for it, unicorns and the butterflies crap that you're pitched up there.

When you buy an income rider attached to a Variable or 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 you need to know about income riders. Some not all income riders offer confinement care or nursing home type benefits. Let me be very clear about something. It's not long-term care. I know that agents are like, well, you can get this annuity with long-term care, right? 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 can help you, but income riders offer enhanced benefit nursing home benefit, confinement care benefit, and there's a lot of rules attached, and we won't go through that.

The income rider side should primarily be used for the lifetime income to understand this. That's where you should base your decision. Still, suppose you're the person out there. In that case, smoking a carton of lucky strikes with no filters every day and inhaling, inhaling, and washing back the Jack Daniels or the Jim Beam or whatever; you qualify for an income rider with the 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 suitable for people who want supplemental coverage for those types of benefits.

Never replace your long-term care policy with an income rider with confinement care benefits. Ever. If anyone ever tells you to do that because you’re getting an upfront bonus, run away from that person and before you do, backhand them and smack them in the face because that is a horrific recommendation. But if you can't qualify for long-term care coverage because you have to go through the underwriting process and smoke all those cigarettes and drink the Jack Daniel's 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 want 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.


One more thing about income riders again, there's a lot to it. One thing that people always ask me is, what about inflation, Stan? Nobody has a product that adjusts for inflation, but some income riders are attached to index annuities. They say the following, Well, when the index annuity goes up in value and locks in, the net locked-in increase will increase over here on the income rider, and you say, "Wow, that sounds fantastic. That's the best product I ever heard of." Catch a problem asterisk. Here's the truth. When someone said that anytime an annuity of any type has the potential of increasing your income stream with either a cost of living adjustment or an index increase and somewhat pitches you, that is too good to be factual nonsense.

Understand, the annuity companies have significant buildings for a reason. They don't give anything away, and they know when we will die. 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 knowing that you already own the best inflation annuity on the planet 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.

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