We have written extensively about the benefits and limitations of annuity income riders. There is a lot to learn about these accounts and we do our best to educate consumers online, over the phone and in person.
The purpose of this article is to discuss some of the innovations with newer income riders. Not all are created equal, but we help tailor our recommendations to what best fits your short and long term investing goals.
First, a little background: Annuity income riders are usually separate riders purchased along with a fixed or indexed annuity account. Some are free while others have an annual cost deducted from the walk-away value of the contract.
An income rider creates a separate account (sometimes referred to as a ghost account) that increases each year at a predetermined rate – say 7%. After some years of deferral, the income account is activated and it creates a lifetime stream of income for the annuity owner(s).
In other words, there are two accounts with two separate values at work. One that the owner (or beneficiary) can withdraw lump sum and the other that is used to create a lifetime stream of income. If you would like more information about how these account work, please click here.
Some new annuity income riders will leverage their payouts in order to account for long term care expenses. Should the income rider be activated and the insured be confined to a nursing home, then some contracts will triple the systematic payout for a maximum of 60 months.
There is no medical underwriting necessary for this feature; it is just an added benefit to help account for LTC costs. After 60 months, the income rider would revert back to its normal payment for the life of the insured(s) even if the annuity and/or ghost account was depleted.
Unfortunately, most riders that allow for a leveraged long term care payouts will only cover care in a nursing home environment. In the future, perhaps some riders will also leverage for home health care and assisted living.
It should be noted that there are traditional and hybrid policies that are more geared toward solely accounting for long term care costs. They will offer more flexibility and features than the income riders mentioned above.
One of the benefits of an annuity income rider is flexibility. These riders can be placed in deferral for several years in order to maximize future income. Once the income has been turned on, many riders allow the owner to turn it off and then back on later as needed.
In some cases, the accumulated income not withdrawn while the rider has been turned off can be accessed lump sum at a later date. If for example an activated income rider paying $10,000 a year was turned off for three years – the owner could withdraw $30,000 in a lump sum when the rider was reactivated.
This can be helpful for those who need the flexibility and accessibility of large sums of money at different times. This could be due to tax implications or inherited wealth or any other number of reasons. Most importantly, it is not a use it or lose it proposition for the annuity owner if income is turned off.
Depending on your future income needs, it may be necessary for the systematic payments to increase year over year. Insurance carriers have accounted for this need in different ways so that your income can ratchet up over time.
Some riders will simply start at a lower rate and then increase by 3% each year. In other cases, income can grow based on the performance of the annuity itself. And others will track a known inflation indicator like the CPI and adjust future income based on its movements.
Constant and steady income may be right for some while income that adjusts for inflation might be better for others. There is always a trade-off when introducing new features to an income rider, but the important factor is that annuity owners have a choice.
Hyers and Associates is a full-service, independent provider of fixed and indexed annuities. We do the shopping for you. It does not affect your returns in any way to use our agency for your annuity transaction.
We will help you compare the various annuity riders and options available in your state of residence so that you may invest in the account that best suits your present and future needs.