There are several different kinds of annuity products available as well as a la carte options to customize your contract to meet your unique needs. One of these additional options is the Income Rider, and despite its popularity, many are still confused about how this annuity benefit works.
An Income Rider is not a stand alone product, but instead is an optional attachment to a deferred annuity at the time of application. They are usually purchased with variable annuities (VAs) and Fixed Index Annuities (FIAs). A recent article from The Street described an income rider as a “policy handcuff” of sort because once you add one, it’s difficult to walk away from the contract.
As the author, Stan “The Annuity Man” Haithcock explains it, once an income rider is added to an annuity contract, two sides of the contract are created. On the one side you have the accumulation value, or “walk-away” amount. This would be the potential growth from the separate accounts in a variable annuity (i.e. mutual funds), or the potential index call option returns in a fixed index annuity. On the other side is the income rider benefit amount. It is a totally separate calculation from the accumulation value that can’t be cashed in or transferred to another annuity. The income rider value can only be used to calculate your first lifetime income payment.
Often times, the details of how riders work are muddled when an annuity product is sold. When calculating the cost of an income rider, your life expectancy at the time you start the payments is the biggest factor considered. Interest rates play a secondary role. The income stream is a combination of the return of principal plus interest, drawing down your account with each payment. But even if your account is drawn down to zero, the annuity company will still be required to pay you, which is the beauty of guaranteed lifetime income that is only promised with an annuity product.
Income riders allow you to maintain a certain level of control of your annuity when compared to deferred income annuities (DIAs). When you purchase one, you are purchasing the ability to change the start date after the policy is issued. Similar to Social Security, if you hold off on receiving payments until you are older, therefore lessening your life expectancy, your payments increase. On the contrary, your payments will decrease if you begin taking them at a younger age.
If you’re looking for guaranteed income in retirement, you have to choose whether you need income now or income later. If you’re seeking income later, an income rider might be a good option for you. As always, consult with a trusted financial advisor when deciding which financial tools are right for you and your unique needs.
Written by Rachel Summit