3 Reasons Why An Income Rider Might Be A Bad Idea
Growing up we’re often taught to eat everything on our plate. There are ways to get around this if you happen to have a dog, but if you don’t, then you might have to get a little creative.
Income riders are sold with annuities as an add-on feature like anchovies on your pizza or extra sauce on the side. In some cases, income riders are misrepresented by annuity salespeople so investors end up with a feature they don’t even want or need; in other cases, they can solve the income problem by giving you more flexibility and guarantees. If you’re wondering whether or not an income rider might be right for you, here are four reasons why you might want to say “no thank you” and take a pass.
REASON #1: YOU DON’T NEED THE INCOME
While it seems obvious that if you don’t need an income you probably don’t need an income rider, this benefit is sometimes misrepresented. If the reason you’re considering an annuity is that the salesperson is promising you a guaranteed rate of return somewhere in the neighborhood of 6 or 8 percent, then you might want to look closely at the terms.
Income riders are not designed to be a guaranteed rate of return. Instead, they essentially create an alternate account that is separate from your actual account value. This account—which for our purposes we’ll call the Income Account—often grows at a higher rate of return than your actual account. The value of the Income Account is typically what the insurance company uses to calculate your income payments, but the income when paid comes out of your actual account. In fact, you may not have access to the money in your Income Account as a lump sum. Its only purpose is to give you a higher number from which to configure the income payment. If you don’t need an income, why would you want to pay this additional fee?
We’ve seen fees for income riders upwards of 1.25 percent, and this fee is ongoing for the life of the account. If you think you might be paying this fee unnecessarily, fill out this form to have one of our advisors analyze your annuity contract.
REASON #2: YOU’RE LIFE EXPECTANCY IS BELOW AVERAGE
When you add on an income rider, you are basically adding a layer of protection against the risk of outliving your money. While the income when paid comes out of your actual account, it’s typical for the insurance company to give you additional guarantees when you add the income rider. Sometimes known as “guaranteed living withdrawal benefits” or a GLWB, this feature promises that even if your actual account hits zero, the insurance company will still continue to pay you the income.
You can elect to have the income rider pay for one life or two. This can give married couples peace of mind because women tend to be younger than their husbands and they typically live longer. If you happen to be single with a pre-existing health condition or reasons to believe that your life expectancy may be less than average, then paying for an income rider may not be in your best interest.
It’s much cheaper to get an income using an annuity without adding the income rider, and you can still get lifetime income guarantees. Furthermore, some annuities that offer GLWB are still invested in the stock market, in which case the fees might mean you’re paying a lot for a benefit that allows you to spend your original contributions and nothing more. To have your situation analyzed by a professional, reach out to us, and one of our retirement income planning specialists will get back to you.
REASON #3: YOU DON’T NEED ACCESS TO THE FUNDS
In addition to the lifetime income guarantee, adding an income rider can also give you more flexibility. Without the income rider, it’s typical for insurance companies to “annuitize” your money once you begin receiving the income payments. When a pot of money is annuitized, then you no longer have access to it as a lump sum. The only way you can receive this money is via regular payments.
Annuity contracts with an income rider attached are typically not annuitized. You may still have access to your money, particularly in the event of a chronic illness or long-term care event. The terms of your living benefits should be explained to you by the professional who sells you the annuity contract. In some cases, withdrawing more than a certain percentage of your account —usually 10 percent—may trigger a surrender charge or change the terms of your income payments.
If you’ve done the planning and already have an emergency account or another source of liquid funds, then you might not require the flexibility of an income rider. We hope this article has been helpful. If you still have questions about your specific situation, please reach out to one of our advisors. We’d be happy to answer any and all retirement income planning question.