Annuity Income Riders
Get a Quote »Several fixed, indexed and variable investment accounts offer guaranteed annuity income riders as a means to provide stable and predictable future income for the account owner(s) during retirement.
Income riders, also referred to as living benefit riders, will provide predictable growth through a guaranteed future income stream. However, it is very important to understand any potential limitations before purchasing an annuity contract offering such benefits.
Understanding Your Annuity Income Options
Given the myriad annuity products available, it should come as no surprise that there are several different income rider variations. Many riders are offered at no additional cost while several other higher yielding types will offset potential earnings each year by a predetermined percentage cost stated in the contract.
Several require a forced future annuitization while others allow the income stream to be turned on and off. Still others only apply to an income generating sub-account that can be chosen in lieu of the actual accumulated walk away value of the annuity. Investors will need to make some decisions upfront as to which type may be best for them and their beneficiaries.
Indexed Annuity Income Rider & Sub-Account
The most popular future income generating accounts are really sub-accounts and come at no additional cost to the contract owner(s). In this way, there will be two annuity values at work.
The first is the true walk away value that allows the owner to withdraw all funds, penalty free, at the end of the annuity term; five, seven, or ten years for example. Simply stated, there are no strings attached to the annuity contract after the term has expired. The owner is free to do whatever they wish with the accumulated value.
The income account account is the second value and is a separate amount that is sometimes less, but almost always greater than the walk-away amount. The income account requires annuitization in order to access its value in entirety. The income sub-account usually guarantees a 5-7% or greater return each year on all monies deposited. Still other sub-accounts will offer an above average bonus of 20% or more on the annuitized value.
Annuitization is a systematic withdrawal of annuity income and principal over a given term - usually a minimum of ten years, but often for a lifetime. Once started, it cannot usually be terminated until all funds have been distributed to the owner or the owner’s beneficiaries. In this way, the income stream most closely resembles a guaranteed pension payment. Once annuitized, annuity owners may have limited access to their principal, but are guaranteed a desired stream of monthly or yearly income.
The Income Generating Sub-Account Advantage: Choice
The benefit of a sub-account income rider is choice and flexibility. Investors can either walk away with the accumulated value, reinvest for a new term with the same company, transfer the funds to a new annuity with a different company, take monthly income without annuitization, or annuitize the sub account value and create regular income payments.
In this way owners are in control of their money; annuitization is not forced upon them. The goals and financial needs of the owner may have changed since the inception of the account. Income through a forced annuitization only makes sense in some cases, but is not the standard method of withdrawing all funds.
Guaranteed Income Riders With Annual Cost
In some cases, investors may want to add an income rider to their indexed annuity account at a predetermined cost. This would make sense for someone who is trying to insure greater future income and is less concerned about growing the walk-away account value. Consumers who are a few years from retirement with current investable assets might purchase a higher yielding rider with an annual cost to maximize future income.
This income rider usually costs a few basis points. One half of one percent is a common annual cost. The yearly roll-up percentage will vary depending on the annuity company and the chosen rider. The annuity itself is usually placed into deferral for at least five years to allow time for accumulation in the income account.
When ready, policyholders can withdraw systematic payments from their account.
The amount invested, time in deferral, and rider selected will determine the known future payment amounts.
In some cases, the future payments can be greater if the annuity has performed well, but they will never be lower than what is guaranteed by the insurance company.
The systematic payments can increase (never decrease) year over year based on the performance of the annuity itself – even after the annuitization has begun. Variable and indexed annuity platforms do allow the annuitized income payments to grow if the overall markets behind them are performing well.
Advantages Of Annuity Income Riders With Annual Cost
Typically, these accounts offer the largest future guaranteed income payments to the annuitant. If investors are only concerned with locking in a growth multiple (5%-8% for example), then this income rider might work best for them.
It is important to view illustrations that will predict future payment streams. With this information, prospective buyers will know which company is offering the best returns on their investment and therefore the largest future payments – not just now, but upon annuitization.
Is Annuity Income Really Guaranteed?
The short answer is yes and no. Yes, policyholders are signing a contract with an insurance company that guarantees future income through a growth multiple that is locked in and cannot decrease. All of these factors are built into the contract from the beginning.
No, the insurance company backing your policy could (like any company) go out of business or be placed in receivership. While this is very rare with fixed and indexed annuity providers, it is not out of the realm of possibilities. Thus, it is very important to choose a stable and well rated insurance company offering an attractive income account.
Summary And Quote Request
It should be clear that not all income annuity accounts are created equal. Some riders will reduce earnings while others only apply to an optional sub-account. When thinking of future annuity income payments, it is a very good idea to speak with a knowledgeable agency (like us) and explore all of your options.
There are certain account options that work much better than others depending on your investment needs and goals. And in most cases, future investment flexibility is most important. Contact us today to compare illustrations from several reputable carriers.
