What Every Retiree Ought To Know About Income Riders
It’s served in high-end restaurants and known for its firm but melt-in your mouth texture, a bass that’s “not fishy” and pure snowy white. Only it’s not a type of bass, it’s a type of cod. The Chilean Seabass as fine diners know it didn’t even exist until 1977 and before then, it was known by scientists as the Patagonian Toothfish.
The same kind of bait-and-switch marketing schemes is sometimes used with income riders sold on annuities. Perhaps no other financial feature is more confusing and yet people still buy them, sometimes without even knowing it.
The way an annuity guarantees lifetime income is the addition of an income rider, but the benefits and features offered by riders vary so much from insurance company to insurance company, they are often called different things even if the annuity itself is the same.
There’s nothing fishy about this Income Rider Q&A – just the facts.
Q: Are income riders free?
Usually not. There are some free income riders on the market, but the saying “you get what you pay for” applies here. If you work with a knowledgeable advisor, he or she should take the time to explain the income rider fee, how many years it will be charged, and from what account it will be deducted. The fee for most income riders is around 1% with fees that can go as high as 2% to guarantee the income for more than one life, such as for you and your spouse.
Q: If I want an income, do I have to get the income rider?
It depends on the kind of annuity. Some annuities, such as immediate annuities, convert your money immediately into an income stream, so you do not have to add the income rider. While this might save you the fee while still giving you guarantees, you do lose access to the money as a lump sum. In this case, the money is said to be annuitized and it can only be accessed as the monthly payments during the time of the specified contract. With most fixed indexed annuities, however, the income rider allows you to receive the guaranteed income without annuitization.
Q: Can I use the money in my income rider account to make a down payment on a condo?
Great question! This is perhaps the source of the most confusion because when you elect an income rider, you in effect create a secondary account. This account is called different things by different companies. We’ll call it the Income Account. The Income Account is not a numerical value that reflects the actual value of your account, rather it’s the number used by the insurance company to calculate your income payments. So the answer is no, you cannot access the money in this account as a lump sum.
Q: My advisor told me that I would earn 8 percent guaranteed with the income rider. Why isn’t that what my account is earning?
Income Accounts often grow at a higher rate of return than your actual account. The thinking here is that the bigger this pot of money grows, the more income you will be paid out. This is not always the case, however. Sometimes investors are lured by high return rates and even “bonus money” that only applies to the Income Account and doesn’t give them a higher income payment in the end. The real question you want to ask your advisor is: how much will my income be? You can have the income rider on your annuity tested against other income riders of similar annuities by going here.
Q: When I die, will my kids get the money in my Income Account?
If legacy is important to you, then this is a good question to ask your advisor. The Income Account number is usually a bigger number than your actual account value. Some insurance companies specify that your beneficiaries will be paid the value of the Income Account upon your death; other companies specify that your beneficiaries will be paid out only the amount of your actual account value.
Q: Are Income Riders the same thing as Guaranteed Living Benefits?
In most cases, yes. Living benefits are a term used by life insurance companies to speak to the benefits you will receive by investing with them while you are still alive. Being paid an income for life is one benefit of the income rider. Other living benefits might include access to your money in the event of a chronic illness or long-term care event.
Q: If my account runs out of money, does my income rider guarantee that I will still receive my income payment?
If longevity runs in your family and you are concerned about running out of money, perhaps no other financial instrument offers more peace of mind than the income riders that guarantee lifetime income. In most cases, if your actual account runs out of money but you have this guarantee, then you will still receive your income payment. Be sure to check with your advisor so that you understand what these guarantees mean before you buy.
While income riders are often the source of investor confusion, they can also lead to greater peace of mind and a greater guaranteed income. If you have questions or concerns about your income rider, please reach out to us. We are always happy to clear up any confusion. As always, your information is kept 100 percent confidential and there are no strings or hooks attached.