Income riders: Use them or lose them
August 20, 2017 by Keith Singer, JD, CFP
Traditionally an annuity (which is derived from the Latin word annum) was used to create an annual payment stream. Although most people like getting periodic checks they don’t like giving up access to their principal. In an effort to help consumers create periodic lifetime income without giving up control of principal or disinheriting their heirs, insurance companies started offering income riders. These contractual provisions, allow annuity owners to withdraw a specified amount of money from their annuity contracts with the guarantee that the periodic income will never end as long as they are alive, even if their account value gets depleted. Unlike traditional income annuities, these contracts allow people to maintain control of their money.
Most of these income riders provide that the amount of guaranteed income will increase by a specified amount (commonly between 6% and 7%) each year that the annuity owner defers taking income. Unfortunately, I have found that some advisors have irresponsibly allowed consumers to believe that these riders provided a guaranteed return of 6% to 7%. The truth is that the percentage increase offered by income riders do not guarantee any returns on one’s account. These percentages are simply a calculation of future annual income increases. Moreover, many people purchase income riders at an additional cost without having received any advice on how to maximize the value of their income riders. In order to receive a financial benefit from an income rider, you need to start taking income early enough in your life that you have the opportunity to deplete your account (even if you don’t spend the income) and start getting into the insurance company’s pockets. Until you run out of money, you are only spending your own money. If you die without having depleted your account, your income rider will have provided no financial benefit.