Income Riders have become an popular feature with Fixed Indexed Annuities. And it’s not difficult to understand why. Talk of 7% or 8% percent guaranteed returns is attractive. But they are not a one-size-fits-all type of product, suitable for anyone who wants to generate an income stream.
Not to suggest that income riders are inherently bad products. They can be great for the right person. For example, someone who is looking to accumulate that 7% or 8% roll-up value over the course of 10-15 years and then take an income stream is typically a good candidate for an income rider. This allows time for the rollup to gather some steam and for the client to see some real accumulation on the income value. Since they will be taking a percentage payout based on the income value, the guaranteed roll-up is an attractive feature.
However, let’s look at another example. For someone who is 65 years old and only has five years until his or her RMDs begin, a cost/benefit analysis strongly discourages the use of an income rider. The client will only have five years of roll-up time before they start taking yearly distributions. In most cases, when the income is “turned on,” the rollup ceases and the income value and actual account value will be reduced by the amount of income taken each year. However, just because the roll-up stops doesn’t mean the client quits paying for the rider. The cost will generally continue until the client dies or surrenders the policy. At an average cost of 60 basis points, the income rider’s cost will likely outweigh the benefits.
Questions to Ask While Determining Suitability:
1. Is passing money on to a spouse or other beneficiary a desire for your client?
If the answer is yes, income riders are not an efficient way to pass along a legacy. In a
flat market, the fees accompanied with the withdrawals will erode the principle and reduce the amount transferred to a beneficiary.
2. Will the annuity be funded with qualified or non-qualified money?
In the case of qualified funds, some income riders treat required minimum distributions as excess withdrawals. This will reduce the “allowed” payout in subsequent years, and the client could be subject to surrender and/or withdrawal charges.
3. Is the income needed sooner rather than later?
A recent study of income riders noted it would take approximately 16 years for the benefit to equal the cost of the rider.
Every product, including attached riders, is subject to suitability requirements. The key to evaluating ‘suitability’ is to fully understand how a product operates — which further requires that producers know what questions to ask. To do anything less in the current expanding regulatory environment is inviting trouble.
More suitability questions? Call our Annuity Department at 1-877-645-4939.