The Truth About Income Riders
July 11, 2017 by Rich Lane
Many conversations about fixed annuities now lead to talk about adding income riders.
Your clients may even think of adding an income rider to an annuity as the best of both worlds. They may look forward to getting income from the income rider, along with accumulation of assets from the underlying indexed annuity, or traditional fixed annuity.
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But this seemingly smart recommendation has a downside: While income riders can help clients meet future income needs, the riders also can drag down clients’ potential for asset accumulation.
For many clients, the thought of having a secure, stable income guaranteed for the rest of their lives can and should be a huge draw. The fact, however, is that all annuities have the ability to offer a guaranteed lifetime income stream, or another type of payout designed to match a client’s specific income needs. That’s because income options are part of every annuity contract. Those options don’t cost anything.
The addition of an income rider to a base annuity contract, while adding some flexibility to a client’s income option, isn’t free. It comes at a cost.
Your clients may be thinking that, with an income rider, “I’ll get income, plus accumulation.” In many cases, what they’ll really get is an additional income option, with mediocre accumulation. The rider fee may eat up a significant portion of the interest crediting. Paying a fee for more flexibility in the income option feature that already comes with an annuity contract will drag down a client’s potential for overall yield and accumulation.
To help align clients’ goals with the right annuity purchase, and avoid this drag on their principal, consider the two philosophies behind selecting an annuity: accumulation and distribution.
For a client who is interested in a safe vehicle to accumulate money over time, especially in today’s low-interest-rate environment, a deferred annuity without an income rider would be the right annuity to maximize the chances of meeting that goal.
Many clients buy annuities and never take a distribution. Selling an income rider to those clients could pull down their overall yields and prevent them from accumulating as much money as they could.
On the other hand, a client who is looking for immediate income distributions should consider buying a straightforward immediate annuity.
An immediate annuity can provide an income stream that starts right away, without any added cost. An immediate annuity is easy to understand, doesn’t have any income-rider-related fees or charges, and likely offers a higher payout than a deferred annuity whose income rider is triggered early in the contract.
A frank discussion with a client can lead to important insights about his or her financial goals.
As a financial professional, you should be aware of both the reasonable benefits an income rider can provide and the considerable drawbacks of adding an income rider to an annuity purchase in today’s low-interest-rate environment.
It’s your job to frame the potential outcomes in terms clients can easily understand, to ensure you’re setting them up successfully for the long term.
