Don’t Just Watch Your Annuity Income Rider!
January 11, 2017 by Stan Haithcock
Most variable or fixed index annuities are sold with attached benefit income riders that guarantee a lifetime income stream starting at a future date. Too many annuity owners never take advantage of that risk transfer benefit that income riders provide and simply track the rising income rider value on their statements as a false sense of security and perceived account growth. They never transfer the risk!
Use it or lose it
Income riders are a separate calculation and phantom account that is used to determine the initial lifetime income stream payment amount. These attached benefits to an annuity contract are a flexible, efficient way to plan for future lifetime income needs, but this policy value is worthless unless accessed in payment form. In other words, you must turn the income rider on because the money in that rider calculation will disappear upon your death.
High interest monopoly money
One of the main reasons that people never turn on their income rider is due to the high interest rate annual growth during the deferral period. Once you turn the income stream on, that growth permanently ends. In a perceived low interest rate world, too many income rider owners believe that they have Jimmy Carter era rates. They don’t.
Income rider dollar values should be classified as Monopoly money. You cannot access the interest, transfer the amount to another annuity, or cash that rider value in as a lump sum. You can only use it for lifetime income.
Fee for life
Most attached benefit income riders charge a fee for those future income guarantees, and that annual fee is deducted from the accumulation value, not the income rider value. In addition, that fee is deducted for the life of the policy, and even after the income stream is turned on.
That’s a residual income for the annuity carrier as long as you own the policy, and validation for my saying “annuity companies have the big buildings for a reason.”
Getting your money back
With any annuity type that guarantees a lifetime income stream, the payments are a combination of you getting your money back with interest. This rule applies to income riders, as well. Because of this annuity fact, it’s common sense that the true value of your transfer of risk strategy is when your account is at zero. That’s when you are in the pockets of the issuing carrier.
The good news about drawing your annuity account down to zero is that the annuity company must still pay regardless of how long you live. With annuity lifetime income guarantees, “there’s no ROI till you die” (another AnnuityMan saying!). In other words, there’s no way to calculate the Return on Investment (ROI) until your death because up until that point, it is a pure transfer of risk and the unique benefit proposition that only annuities provide.
Part of the agent dream sold
Income rider popularity will continue to grow as more baby boomers retire. The typical agent dream sales pitch is that you can “have your cake and eat it too” by adding income rider guarantees to overhyped annuity growth projections. If an income rider is added to your variable or indexed policy, your buying decision should be primarily based on the income rider guarantees, and you should plan to turn on that lifetime income stream in the future.
Owning an income rider is not a spectator sport. You need to transfer the risk, and put the annuity carrier on the hook to pay regardless of how long you live. Otherwise, your income rider is worthless, and just another profit center for the annuity company. Stop watching that phantom growth, and start collecting those guaranteed payments.