Phillip Wasserman on “income riders.”
October 23rd, 2014
When an annuity is annuitized the money is given to the insurance company, which then returns it back to the client based on a contractual obligation. The client can receive their money as an income stream for life or over a predetermined number of years, or a combination of both. Regardless of which payout option is selected, the client has no control of their money. In recent years, annuities have added an income rider to their menu of options. This rider allows the owner of the annuity to receive guaranteed lifetime income from an annuity without annuitizing it and therefore retain full control of their money.
These riders are offering the best of both worlds: guaranteed income and availability of the lump sum of money if an unexpected need arises. The riders have various forms but some common features. They all have a payout factor based on the age of the annuitant. Many have guaranteed growth rates that apply to a special “Income Account Value.” All of the riders guarantee an income stream that can go up but will never go down as long as the owner does not take additional withdrawals from the annuity. Most of the riders allow the owner to turn the income on and off as they choose.
Income Account Value – The Income account value is only a number that is used to calculate income at the time the client wishes to activate the rider. The income account value is NOT the same as the account value. The account value is the client’s money and grows based on the crediting method that is selected every year during the annual review. Many clients confuse their Account Value (their actual money) with their Income Account Value (a value which is used to calculate a guaranteed income stream). Most income riders have a guaranteed growth factor that creates a separate income bucket (Income Account Value), which then grows at a guaranteed rate. You must carefully read the fine print on these riders to determine what will keep you from receiving these guaranteed growth rates. Many riders do not give the guaranteed growth rate if a withdrawal is made in the year. This means that if the annuity is in a qualified account, and the client is over 70 ½ years of age, the required minimum distribution, which must be taken by law, will nullify the guaranteed growth. This is particularly true in the larger growth rates.
Payout Factor – All Income Riders have a payout factor. This factor is a percentage that is based on the age of the annuitant when they first wish to receive a guaranteed income. These factors are almost always the same:
5% at age 60, 6% at age 70, 7% at age 80 and above. However, in different insurance products, the factor changes every 10 years, every 5 years, or every year.
Product A – Payout factor = 5% at age 60, 6% at age 70, 7% at age 80 and above.
Product B – Payout factor = 5% at age 60, 5.5% at age 65, 6% at age 70, 6.5% at age 75, 7% at age 80, 7.5% at age 85 and above.
Product C – Payout factor = 5% at age 60, 5.1% at age 61, 5.2% at age 63, 5.3% at age 64, up to 8% at age 90.
All income riders have a fee associated with them. These fees are usually within a 35 to 50 basis point range. Some of the fees are taken only from gain (e.g. no gain = no fee) and others are taken regardless of the performance of the annuity.
By: Phil Wasserman