Several fixed and indexed annuity accounts offer income riders as a way to provide predictable income payments during retirement. We can help you compare these guaranteed income annuities to see which products are best suited to meet your needs.
There are many different income rider variations to choose from. Some riders have no cost while others charge a small 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 are also an option with some insurance companies.
Usually we have a table here to help you compare the best annuity income riders, but it’s more complicated than that.
All owner information must be plugged-in to see which plan(s) offers 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 oppose 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, we 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’s 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.
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 withdraw, 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 and is used only to create a lifetime stream of income. 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 an annuitization.
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, income riders have an yearly annual 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. It’s common for annuitants to defer their income for several years in order to guarantee larger future payouts. However, it only makes sense to purchase an income rider if future lifetime income is your primary goal.
When ready, you can being 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 (never decrease) based on the performance of the annuity itself – 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.