Over a little more than a decade, guaranteed lifetime income riders have become all the rage as an attached benefit to deferred annuity policies.
A deferred annuity is a special contract that delays income or payments until an investor is ready to receive them. Deferred annuities may be fixed or variable, but in either case, investors must first go through a period of saving followed by a period of receiving installments or income from the account. These days, many investors are seeking deferred annuities with pension-style guaranteed lifetime income riders to ensure that they have life-long income without market risk.2,3
Income riders solve the longevity risk associated with many investment vehicles by providing an income stream that will last a lifetime. But income riders can be expensive and confusing. They should primarily be used to plan for income received later on in retirement and not necessarily as money that passes on to beneficiaries. 1
A deferred annuity with a guaranteed lifetime income rider consists of two basic parts: the investment part and the rider benefit. The investment consists of separate accounts (such as mutual funds, for example) but the income rider benefit is a risk transfer to the annuity company that requires them to pay you a lifetime income stream that will start at the date of your choosing. This income stream can only be used as income and can’t be withdrawn as a lump sum. 1
In most cases, income riders can’t be used by beneficiaries as a death benefit, but keep in mind that income riders can vary from one carrier to another. Below are some basic details that every investor should know about guaranteed income riders:
The roll-up rate is the guaranteed rate at which the income base grows while you’re deferring. This rate stops as soon as you begin to withdraw the rider benefit. Some income rider products offer compound interest while others offer only simple interest and upfront bonuses can be applied to the rider in some cases as well. A high roll-up rate does not guarantee a high payout. A low roll-up rate does not mean that the payout will be low. 1
Some income riders offer a roll-up rate for a specific time period. For example, an income rider could offer a 6% annual rate for 9 years, but after that time period, the guarantee could change to a different rate. This new rate can’t go lower than 3%. Many annuity income riders offer a roll-up rate between 5-10%. Annuitants may be required to defer for a specific period of time and they may have to wait until a particular time of year before the income can start. 1,3
The actuarial payout is a percentage that’s used to calculate your lifetime income stream from the income rider total. Lifetime income payments are always based on your life expectancy at the time when you decide to start receiving payments. The actuarial payout rate can play a more important role than the roll-up rate in determining the amount of the actual payout. 3
Fees associated with a guaranteed lifetime income rider is taken out of the investment side of a deferred annuity. For example, an income rider that’s guaranteed for 10 years of deferral at 6% at a fee of 0.95% will affect the accumulation value of the annuity investments (mutual funds, etc.) not the income rider. 3
In some cases, income riders grow at a smaller rate, but charge no fee at all. 3
An annuity guarantee is only as good as the company that backs it and that includes income riders. State guarantee funds that are put in place to protect policies up to a specific level don’t generally cover income riders so do some research into the carrier offering the annuity and income rider before buying in.
There are a number of different income rider options currently available to annuitants, but all of them offer different guarantees and follow different rules. Before you purchase an annuity, be sure to take your time and learn the facts about each annuity product to decide which one is right for you.
Watch the video below for more information on Guaranteed Lifetime Income Riders.
1 - https://www.marketwatch.com/story/5-key-questions-on-annuity-income-riders-2013-09-03
2 - https://www.investopedia.com/terms/d/deferredannuity.asp
3 - https://annuityguys.org/annuity-types/hybrid-annuities/hybrid-income-annuities-hybrid-income-annuity-riders/