Lifetime Annuity Income Riders

Annuity income riders are growing in popularity as a way to provide a predictable lifetime income in retirement. Many fixed and fixed-indexed annuities offer these optional riders with or without an annual fee. We help our clients compare guaranteed income annuities to see which products best suit their investment needs.

There are many different income riders to choose from. Some have no cost while others charge an annual fee. Several factors will determine which riders offer the best income, including your age, gender, deferral period, spousal continuance, rollup, and payout percentages. Policies with increasing income (and those that are front-loaded) are also available from different insurance companies.

By clicking on the green button below, you can view personal lifetime income scenarios. We encourage you to speak with our agency as there’s a lot to know and understand about the many options available.

Posted below are examples of what income can look like with a couple of carriers.

All owner information is entered to see which plan(s) offer the highest income for a particular household.

The two most important variables in determining future income are your age now and your age when you want income to begin.

All things being equal, some products may illustrate better after 10 years of deferral as opposed to 11 years or longer. Gender will affect income streams, as well as adding a joint annuitant. Furthermore, some products and riders are not available in all states.

In other words, it’s best to illustrate payouts on a case-by-case basis. An income rider that increases in deferral by 7% each year can have smaller future payments than one that increases by 6.50% Why? It has to do with the income payout percentage after deferral. Maybe the 6.50% rollup offers a 5.50% payout percentage when payments begin and the 7.00% account is at 5.00%. That half-point can make a big difference once your income stream begins.

There are a lot of metrics at play. We help our clients compare and contrast all of their options.

Annuity Income Rider Examples: Lifetime Payout Amounts

For this table, we used $100,000 as the deposit amount. It assumes a single person age 65 starting income immediately, after a 5-year deferral, and then after a 10-year deferral. It assumes the same for joint income where both spouses are age 65.

These numbers will change based on several variables, but they do give a good idea of what kind of lifetime income in retirement someone might expect using an annuity income rider strategy.

Income riders are best understood as sub-accounts. They are separate account values used solely to calculate a future income stream. In other words, there are two accounts at work: the walk-away account value (accumulated value) and the income account value.

The walk-away account is the accumulated value available for withdrawal, surrender, or at death. There are no strings attached and the owner (or beneficiaries) are free to use these funds as they please.

The income account is the second value. It is used only to create a lifetime income stream. It is usually greater in value than the walk-away amount, but it’s not available for a lump-sum distribution. The income account can only be accessed through annuitization.

Sometimes referred to as Guaranteed Lifetime Withdrawal Benefit riders, a GLWB provision can be added to both indexed and fixed annuity accounts. They are much more commonly seen when paired with an indexed annuity, however.

Annuity Deferral First, Then Income Later

While in deferral, the income subaccount guarantees a declared rate of return each year – usually 5-8%. It may also offer a sizable annuity premium bonus depending on the annuity product and rider. The account value increases each year by the declared rate until the rider is activated (annuitized) and lifetime income begins.

(In some cases, income can be turned on and off as needed which is unique to these products. In other cases, the lifetime income amount can increase year over year based on certain parameters like index or inflation gains.)

Once the income rider is activated, annuity owners may have limited access to their principal, but lifetime income is guaranteed. The insurance company is obligated to continue payments even after the walk-away and/or income accounts have been depleted.

In most cases, GLWB income riders have a yearly cost to the contract. This cost is taken from the walk-away value, but it does not affect the income value. Income riders usually cost a small percentage each year – one percent (give or take) is a common amount.

Typically, the higher the annual cost, the better the annual increase while the account is in deferral. Most income riders require at least one year of deferral before annuitization. However, some income riders can be activated after only one month.

It’s common for annuitants to defer their income for several years to guarantee larger future payouts. However, it only makes sense to purchase an income rider if future lifetime income is your primary goal. Otherwise, you are paying for something you might not use.

When ready, you can begin systematic income distributions from your account. The amount deposited, time in deferral, and rider selected will determine your payment amounts.

Income payments can be withdrawn monthly, quarterly, yearly, etc.

In some cases, future payments will increase year over year if the underlying annuity has performed well. They will never go lower than what is contractually guaranteed. Systematic payments can increase (but never decrease) based on the annuity’s performance – even after annuitization has begun.

Once a new level of income is reached, then payments cannot go below that amount. Indexed and inflation-adjusted annuities allow income payments to grow year over year. Your income payments (and growth) will be determined by the rider you select.

Riders With Additional Options

Over the last few years, annuity riders have evolved to offer more features. While income is a primary goal, some also offer increasing death benefits and others include leveraged long term care benefits.

These new attributes don’t necessarily decrease your income benefit either. In fact, they can increase it as is the case with a long term care leveraged rider. Some LTC riders double your income for up to five years at home or in a nursing home if long term care is needed.

The short answer is, yes. Fixed and indexed annuities are insured and backed by the full faith of the issuing insurance company. Annuity providers are highly regulated and have strict capital reserve requirements.

All that being said, it is wise to choose a well-rated insurance company when considering income riders. The vast majority of annuity providers have been doing business for several generations – some for more than 100 years. They have always made good on their promise of future income payments.

And of course, annuities are insured per the rules of the State of origination. Most contracts insure owners up to $250,000.

What Are Other Risks or Concerns With Income Riders?

Other than an insurance company defaulting, the bigger concern for consumers is not using their income accounts. When someone is unsure, we recommend investing in a no-cost income rider. While these do not produce the highest income, they allow for more flexibility in the future.

And there’s also interest rate risk. The best time to buy a GLWB rider is when rates are high. This locks in much better income payouts. When rates are low, it can be advantageous to buy a simple fixed-deferred annuity and then shop for income policies when needed. This can lead to higher payouts as well.