Income Riders: When to Use Them, How to Choose Them

  • Originally published December 20, 2011 , last updated November 30, 2016
Income Riders: When to Use Them, How to Choose Them
Because Income Riders are still a fairly new innovation in retirement products, many agents are still unsure of when to use them and how to select the right ones for their clients.

In this article we will try to bring you up-to-date on the state of the income rider and answer any questions you might have about when to use them and how to choose them.

Before we get started, here are a couple resources that might help you with your indexed annuity/income rider sales:

Part I: When is it right to use an income rider?

To truly determine whether an income rider is suitable for a particular client’s situation, you need to get under the hood and figure out exactly what your client needs. Consider the following questions:

What is the purpose of the money? Do they need an income stream to start right now or later? How much income do they need? Have you looked at their budget? How much is coming in vs. going out? Is there a gap? How can we fill it? Do they want to leave money to their family? Is long-term care a concern? How much control do they want to maintain over their money? Are they concerned with outliving their income? Do they only need their RMDs? All of these questions need to be answered before you can make a proper recommendation.

Basically there are two very broad applications for income riders: Clients who want Income Now and clients who want Income Later.

Income Now: In the past, SPIAs were the primary tool for creating an immediate income stream. But, due to innovations in income riders and interest rates currently sitting at historic lows, SPIAs are no longer as competitive as they once were. As a result, Income Riders are often the best choice for clients looking to create an immediate income stream.

Like a SPIA, they allow the client to set up a guaranteed stream that is stable and free from market fluctuations. However, the advantage Income Riders have over SPIAS is they allow the client to maintain control over their principal—something almost everyone wants.

When you create an income stream using a SPIA, essentially the principal is no longer yours. You can’t take it as a lump sum, and it doesn’t become a death benefit for your family. That money is gone unless a period certain is elected. In that case, the internal rate of return will be decreased, providing less income for the client and therefore making a case for an income rider.

Even if an income rider offers a little less income per month when compared to a SPIA, what most of your clients want above all else is control over their money. Income riders allow you to start an income stream, stop it, and start it again, take a lump sum in the form of a free partial withdrawal (from the base contract) and leave the remaining dollars as a death benefit. If maintaining this type of control is important to your clients, an income rider might be a better option. Withdrawals in excess of the income withdrawal or lifetime income withdrawal percentages will cause future withdrawals to be reduced on a pro rata basis.

Income Later: Income riders are great for an income later situation because that allows time for the income base to accumulate at whatever the roll-up rate is (for example: 7% compounded annually with the Income Advantage Rider™ by The Annexus Group®). To do this right though, you need to sit down with the client and really figure out their future costs, what their Social Security benefit is expected to be and any other pension or retirement assets and identify exactly how much income they’ll need to fill that gap.

Our Marketing Consultants can walk you through this process step-by-step, showing you how to have this conversation with your clients and how to set up a guaranteed income stream for them using an income rider.

Call 1-877-645-4939 to talk about your next case.

Part II: 15 Questions to Ask When Choosing an Income Rider

If you’re going to sell income riders, or any product for that matter, it’s important to get into the fine print and really understand how each one works. Otherwise, how do you know if you’re choosing the right income rider for your clients? Some income riders limit the growth potential and flexibility of the product.

But you don’t have time to call all of the carriers and read all of the literature and fine print to determine which income rider is going to be best in each instance. That’s what we’re here for. Let Senior Market Sales be your research department. Below we’ve laid out 15 questions that will help you gauge the competitiveness of an income rider.

We go into specifics on some products, but we’ve refrained from a full on comparison of benefits here just because it could be out of date in a month anyway—that's how fast these products change. And that’s why you need us to help you keep up with it.

 

1. What is the "roll-up" rate?
Most income riders have a guaranteed growth or "roll-up" rate between 5-8%. The roll-up rate is the guaranteed annual rate at which the income base grows. For example, on a $100,000 initial premium, a 10-year income rider at 8% would result in an income base of $215,892. At the end of those 10 years, the client’s income stream would be based on an annual percentage of the income base and their age at the time of initiation.

The rider rate is often the first thing agents look at when comparing products, and it’s usually their main selling point with the client, but here’s a question: does the roll-up rate even matter?

In situations where the client plans on taking income immediately it certainly doesn’t. Even in situations where the client is taking Income Later, a lower roll-up rate could actually perform better. For example, the Income Advantage Rider™ allows your client’s Income Base to build at 8% compounded for up to 18 years. North American’s (NACOLAH) income rider has a 7% roll-up, but the client can let it accumulate as long as they want. Given a long enough time frame, the 6% will eventually catch the 8%.

As you read further, you’ll see there are a number of other factors that go into determining which income rider is the best fit, but the point is when it comes to income riders, it’s not always as simple as bigger is always better. It depends on your client's situation.

2. Is it compound or simple interest?
Comparing income riders might be the only time when 10% isn’t really higher than 8%. Why? Because those income riders out there offering a 10% roll-up rate are actually 10% simple interest—not compound. Did you know that 10% simple is actually 7.2% compounded?

3. How many years can it accumulate?
Many income riders do not allow the income base to accumulate beyond 10 years before you have to start taking income. As we mentioned above, the Income Advantage Rider™ actually has an option for an 18-year roll-up, while NACOLAH has an option for a lifetime roll-up.

This is important in situations where your client doesn’t plan on needing income for more than 10 years.

4. What are the fees right now, and what can the fees increase to?
Most income riders have a current cost somewhere between .75 and .95, and some contractually provide for fee increases up to a full 1.0%.

It is important for you and your client to understand not only what the current fees are, but also how much they could possibly increase. When asset fees were first introduced for Fixed Indexed Annuities (FIAs) they ranged from 1.00% to 1.50%. The contract terms placed maximum spreads at 5% or 6%. Many were told to ignore the maximums because the rates would never go that high. Yet 5% spreads are very common in today’s FIA Landscape. Don’t fall into this same trap with income riders; inform your clients up front.

5. What account are the fees assessed to?
Is it better to have fees deducted from the accumulation value or the income base? Does it matter? Well think of it this way: there could be years where the accumulation value does not grow, whereas the income base is going to grow every year between 5% - 8%, depending on the product. So, since the income base could be larger than the accumulation value, it’s better to have fees deducted from the accumulation account.

The Income Advantage Rider™ deducts fees from the accumulation value, and if there is no gain, there is no fee (See No. 7).

6. When are the fees taken?
Fees are commonly taken annually, but some companies actually deduct fees monthly, so watch out for this when you’re comparing products.

7. Can the rider fees eat into principal?
Some companies deduct rider fees even if there is no gain on the contract, thereby creating a loss on the contract for that year.

With the Income Advantage Rider™ from The Annexus Group®, fees are only deducted if there is a gain on the contract. Therefore: no gain, no fees. This is important because when you’re selling a fixed indexed annuity, one of the big selling points is the notion that the client cannot lose principal. With the Income Advantage Rider™ that statement is still true.

8. Does the income base continue to accumulate if I take a free partial withdrawal or an RMD from the base contract?
Check the fine print. A number of income riders stop accumulating if a partial withdrawal is taken.

9. Is it possible to get a higher roll-up rate than what is stated?
Until the Income Advantage came out in 2009, the answer to this question was always no. If you had an income rider with a 7% roll-up, 7% was the max. With the Income Advantage Rider™, 7% is the MINIMUM.

This raises a good point: you have to take into account the quality of the underlying annuity contract as well. In the case of the Income Advantage Rider™, in our opinion, it is paired with the best indexed annuity on the market, the BAA, which offers no traditional caps on interest growth. The Annexus Group® currently holds 8 patents granted and 5 pending for their innovations in the this market.

10. Are there any extra benefits for LTC or loss of ADLs?
The answer to this is almost always going to be no, except for a couple of notable exceptions. The Income Advantage Rider™ will actually double the income benefit when the owner is confined to a qualified care facility. For example, a $26,000 a year Lifetime Income benefit would become $52,000 a year if the policyholder went into a long-term care facility for 180 days out of a 250-day period.*

RBC’s income rider will pay an extra 50% for the loss of two ADLs. For example, a $20,000 a year lifetime benefit would become $30,000 a year, and the client does not have to be in a nursing home.

11. Is there a bonus on the income base out of the gate?
You’d be surprised what a difference a bonus can make to the yearly payout and lifetime income your clients receive. See for yourself by running a sample case through the Income Advantage Calculator™. Don’t have the Income Advantage Calculator™?

12. Can I remove the income rider at any time?
The Income Advantage is revocable; some are not.

13. How soon can I activate my income rider?
This goes back to the Income Now scenario. With the Income Advantage Rider™, your clients can activate the income stream immediately. Some other income riders have a one-year or even five-year wait.

14. Can I do a joint payout with my spouse on qualified monies?
You can with the Income Advantage Rider™.

 

15. Is it possible to get more than just the accumulation value upon death?
With most income riders, when you take income it depletes the accumulation, or actual, value of the annuity. When the policy owner dies, their heirs don’t get the income base, they get what’s left of the accumulation value—if anything is left.

With the Balanced™Allocation Annuity, your clients have the opportunity to couple the Income Advantage rider with a guaranteed minimum death benefit rider (the Family Endowment Rider®) that accumulates at 4% compounded annually. This allows your clients to take income for years and still leave behind a death benefit that could potentially be larger than the original principal! Annuity agents all over the county have sold millions in annuity premium using this one concept!

Now, you could go through every product and read all the fine print with these 15 questions in mind, or you could let us do it. If you can get the information from your clients, and we'll help you figure out the best product for their particular situation. Give us a call today at 1-877-645-4939.

For agent education only; not intended for soliciting annuity sales from the public.

*Availability varies by state. See “Disclosure Summary” for additional details. This benefit is not long term care insurance, nor is it a substitute for such coverage.

The Income Base is not the same as the Accumulation Value of the base annuity contract, and it is never available for lump sum withdrawal or a death benefit; it is only used for calculating lifetime income withdrawal amounts available under rider provisions. Lifetime Income Withdrawals stop the guaranteed accumulation in the Income Base. The BalancedAllocation Income Advantage™ [form BAAIR (09/09) or state variation], an optional rider for which a charge is deducted is issued by Aviva Life and Annuity Company, West Des Moines, IA and is not available without the purchase of the BalancedAllocation Annuity™ [form BAA8 (09/09) and BAA12 (09/09) or state variation] Product features, limitations and availability vary by State; see the Summary Disclosure for details.