Annuity Income Riders – Fixed, Index, Variable & Hybrid – GWIB, GWB…

Income riders have changed dramatically over the last decade. These innovative new annuity income riders ( also available on some fixed and variable annuities^#) secure future income on a higher **guaranteed basis than what could be the potential outcome if money is left at risk in the market or invested in low earning bank savings accounts. Also, they offer a pension style income that cannot be outlived, and one more thing did I mention — any money that the annuity owner does not spend or use for income goes to heirs at death with no penalties! — what other pension does that? There are also some that even go a step further and help with long-term care or home health care needs as well without sacrificing needed recurring retirement income. Enjoy this video by Dick and Eric on today’s popular and innovative new annuity income riders:

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Secure Your Retirement using Living Benefit Annuity Income Riders

Living benefit income riders are another optional benefit that may be chosen on many annuity contracts. These riders must be requested at the time an annuity is purchased, as it is highly unusual to be allowed to add a living benefit rider to an existing annuity.

The first income riders were introduced on variable annuities^# at the turn of the twenty-first century and were created to protect the annuities ability to generate future income despite investment risk to principal. This is accomplished by **guaranteeing the minimum level of income that can exceed what is payable from the annuity investment account value and is paid at a potentially higher income rate regardless of weak growth or losses in the variable annuity^# investment account value. These types of riders became competitively available a few years afterward on fixed, as well as fixed index or hybrid annuities so that not only the income but also the principal could be contractual **guaranteed.

These riders can provide annuity holders with a  for life, and––unlike the immediate annuity––without the need to give up access to the principal in the annuities cash value.

A living benefit rider on an annuity can help to reduce the risk of substantial loss with a variable annuity^# by providing **guaranteed payouts for the risk-averse variable annuity^# holder. Although these riders require additional fees, they will provide a secure **guarantee to protect the variable annuity^# income against declines in the market, in addition to providing a **guaranteed minimum income that will not fluctuate.

With income riders, the income value is totally separate from the annuity’s accumulation value. Normally with variable annuities^#, this income value will grow at a 5 percent to 6 percent compounding rate of interest. Hybrid or fixed index annuities typically have higher income account growth compounded at 6 percent to 8 percent.  Then, when the annuity holder starts taking lifetime withdrawals from the account, there is a payout percentage factor based on the owner’s age that is applied to the income value to determine the amount of the **guaranteed-for-life income withdrawals. For example; a seventy-year-old retiree may be allowed to take a 6 percent draw on his or her income account value of say one million dollars, which equates to sixty thousand dollars of income annually as long as he or she is alive. This is true even if his or her cash value account has only seven hundred thousand dollars accumulated from low-interest earnings and runs out in twelve years or so with continued poor earnings.

If the cash accumulation value is higher than the income account value when the annuity holder starts receiving the income from the annuity, then the accumulation value will be used in the calculation of the life payout instead of the income account value. Once the **guaranteed withdrawal payout percentage amount is determined based on age, the annuity holder may then begin to withdraw that amount of revenue from the annuity each year on a monthly, quarterly, semi-annual, or annual basis throughout the remainder of his or her life.

When the annuity holder begins receiving this payout, he or she will typically have several **guarantees. Two of these include:

• The additional crediting of interest to the annuity’s cash accumulation value, along with continued access to the cash value when needed from the remaining cash accumulation value. (Warning; these excess withdrawals can substantially lower being paid out for life)
• Even though the annual **guaranteed withdrawals from the annuity may deplete the cash accumulation account value over time, the issuing insurance company must continue to make the payments as long as the annuity holder lives, including to the spouse, if a joint payee is selected.

 How Annuity Income Riders Work 

Types of Living Benefit Riders

There are several types of living benefit riders, and they all differ in terms of the benefits that they can provide. Some of these riders include:

Guaranteed Minimum Income Benefit Rider

This living benefit rider **guarantees a minimum future payout, regardless of how the market performs. However, this rider will typically require that the accumulation phase of the annuity be kept in force for a specified time period before the rider will take effect.

This rider is designed to provide the annuity holder with a base amount of lifetime income when he or she retires, regardless of how the interest or investments inside of the account have performed.

It will **guarantee that when the annuity owner is eligible to annuitize the contract––either for life, life plus a certain time period, or for the lives of two individuals––then the annuity income payments will be based on the greater of either the amount that was contributed plus a predetermined interest rate or the maximum anniversary balance of the cash value account based on interest applied or underlying investment earnings prior to annuitization.

In order to receive this benefit, the annuity holder must annuitize the account. In addition, there is normally a required holding period of ten years before this rider may be exercised.

Guaranteed Minimum Accumulation Benefit Rider

This living benefit rider will ensure that the annuity holder is able to retain the value of the contributions plus a minimum growth, regardless of the investment losses or lower earnings. This benefit will also require a specified period of time to determine if the annuity’s investments or interest is lower than the **guarantee; the annuity issuer will then make up the difference in income as required.

In other words, the **guaranteed minimum accumulation benefit rider will **guarantee that an annuity owner’s income account value will be at least equal to a certain minimum percentage of the amount that was contributed after a specified number of years, regardless of the actual performance of the investments. Typically, the holding period is somewhere between seven and ten years.

Guaranteed Minimum Withdrawal Benefit Rider

This living benefit rider option will **guarantee a return of the contribution amount through a series of fixed annual withdrawals. These annual withdrawals are **guaranteed until the annuity holder’s principal is returned, regardless of the investment performance or interest earnings.

Therefore, this rider **guarantees that a certain percentage of the amount that is contributed can be withdrawn annually until the entire amount is completely recovered, regardless of market performance. It should be noted that in this case, reducing the amount of the withdrawal in one year will not allow the annuitant to increase withdrawals in subsequent years.

However, if the annuity owner decides to defer the withdrawals and the value of the annuity account grows, then the amount of subsequent withdrawals that are allowed could be larger.

If the investments in the annuity account perform well, then there will be an excess amount in the account at the end of the withdrawal period. However, if the underlying investments perform poorly and the value of the annuity account is depleted before the end of the withdrawal period, then the annuity owner can still continue making withdrawals until the full amount of the original contribution is recovered.

Also, should the annuity owner decide to terminate the account before the end of the withdrawal period, he or she may then receive the amount of the cash surrender value of the annuity which could be considerably less than the systematic and **guaranteed withdrawals.

Guaranteed Lifetime Withdrawal Benefit (GLWB)

Another more recent type of **guaranteed minimum withdrawal benefit that was introduced into the annuity world is the **guaranteed lifetime withdrawal benefit. Here, it is **guaranteed that a certain percentage of the account value––usually between 4 and 8 percent, depending upon the youngest of the annuitant’s or spouse’s age if a joint income payout is selected––may be withdrawn each year for as long as the annuity holder or spouse, if joint, lives. This percentage varies, depending on the annuitant’s age when he or she begins taking withdrawals.

While in deferral, this type of **guaranteed lifetime withdrawal benefit can compound at 6 to 8 percent or more on a **guaranteed basis. This is not to be confused with the actual annuity cash value account. This account has no real cash in it. It is simply an accounting ledger to determine minimum income owed at the present or some future date.

Surrenders

Typically, deferred annuities will allow the owner to surrender the contract during the accumulation phase and receive a cash payment. The amount that is received is called the cash value or cash surrender value. This sum is equal to the sum of contributions made to the annuity plus any earnings minus any prior withdrawals or charges.

The annuity owner may take a partial withdrawal if he or she cannot fully surrender the annuity during the accumulation phase without a penalty. However, there may be some surrender penalties incurred if more than the penalty-free portion is withdrawn, which is usually about 10 percent annually, as well as federal income tax due on any of the gain.

The amount that is paid to the annuity owner upon surrender may be subject to a surrender penalty. These penalties typically range from 5 to 12 percent. Some deferred annuities will impose a surrender change only for an initial period after the annuity contract is initiated, while other annuities begin a new surrender charge period for each contribution that is made into the annuity. In most cases, however, these surrender charges will typically decline to zero after a specified period has elapsed.

If the annuity owner elects to take a partial surrender, he or she will have the option to do so as a pre-scheduled series of payments under a systematic withdrawal plan. Many annuities will allow annual withdrawals of 10 percent or more of the annuity accounts cash value that is free of surrender penalty charges. In any case, federal or state tax may apply to a portion or the entire withdrawal amount and, when younger than fifty-nine and a half, the tax code may impose a 10 percent penalty for any early withdrawal.

Long-Term Care Protection

Some annuities offer features that are designed to address long-term care needs, such as increased income payouts of two to three times the actual cash account value for long-term care needs. In fact, many annuity accounts also allow their owners to withdraw funds from the account for these needs without incurring any surrender charge or penalty. For example, surrender charges might be waived if the annuity owner has been confined to a nursing home for a minimum period or if he or she is suffering a terminal type of illness.

Additional access to penalty-free funds could even be available for home health care, caregiving, consultation services, or certain types of discounted long-term care services from a specific group of providers.

Are Annuity Income Riders a Good Choice?

To truly determine if a living benefit rider is best for a retirement plan, it is important to understand exactly what the purpose of the annuity will be. For example, certain questions should be answered, such as:

• What is the purpose for the funds?
• Does the annuity income stream need to start soon or at some later time?
• How much income will be needed?
• Is it important to leave money to heirs?
• Is long-term care spend-down a concern?
• How much control should be maintained over the money?
• Is outliving income a concern?

Once the answers to these questions about a retiree’s specific situation is determined, there is some information that must be gathered about the income rider being considered. Some of the important details include:

What is the roll-up rate? Many annuity income benefit riders offer a **guaranteed rate of growth, or roll-up, of between 5 and 10 percent. This roll-up rate is essentially the **guaranteed annual rate at which the income base will grow. Therefore, if an annuity with a contribution amount of $100,000 offers a ten-year income rider at 8 percent, then the income base would be $215,892 just before the payout period. Then, at the end of the ten years, the income stream from the annuity would be based on an annual percentage of the income base determined by the annuitant’s or joint payee’s age at the time that the payout phase began.

Is the interest being credited compound or simple? When comparing different types of annuity income riders, it is important to truly understand the type of interest being credited. For example, a 10 percent roll-up rate is typically going to be based on simple interest, and 10 percent simple interest is the same as 7.2 percent compounded for ten years after that the compounded rate grows much faster and larger.

How many years can the income base accumulate? There are many income riders that will not allow the income base to accumulate beyond ten years before the annuity holder must start taking the income payout. However, there are a select few that allow much longer accumulation periods.

What are the fees now, and can those fees increase over time? Many annuity income riders will have fees of between .40 percent and .95 percent. Also, there are some that may be allowed to increase the fees, after a specified number of years, up to 1.5 percent or more.

What account are the fees assessed to? It is important to understand whether any fees are being deducted from the accumulation value or the income base because there may be times when the accumulation value does not grow. In this case, it would be better to have any fees deducted from the accumulation value.

When are fees deducted? Typically, fees will be deducted on a monthly basis. However, some annuity issuers will deduct them on an annual basis.

Will the income base on the annuity continue accumulating if the annuity holder takes a free partial withdrawal or a required minimum distribution from the base contract? This information is important to know because with some income riders the income base account will stop the **guaranteed roll-up percentage forever if a partial withdrawal is taken.

Are there any additional benefits triggered for long-term care or the loss of function in doing basic daily activities? Sometimes an annuity will offer to increase the income benefit in these types of cases.

Can the annuity holder remove the income benefit rider from the annuity? Some income benefit riders are revocable, and others are not.

Is it possible to get more than just the accumulation value upon death? With most income riders, when the annuitant takes income from the annuity, it will deplete the accumulation. When the annuity holder passes away, then his or her heirs will not receive the income base. Instead, they will receive whatever amount is left of the accumulation account value; if the annuitant lives a long life, there may not be anything left. There are a few annuities that allow the income base, if it is greater than the accumulation account, to be paid out to heirs over a specified period.

Using OutCome Based Planning™ for Your Retirement

We practice and recommend a "Holistic - OutCome Based Planning™ process when considering annuities." This approach has the effect of balancing your overall portfolio so you can meet your retirement objectives by "first identifying the least amount of your investments or savings (if any) that should be considered for annuities." OutCome Based Planning™ analyzes and models multiple outcomes so you can clearly identify your best income and growth opportunities.

"The Annuity Guys will only call if you request help". Hence, when you are ready for specialized help we will be available.

"Working with an Experienced Fiduciary Financial Planner can help you Avoid a Trial & Error or Risk Based Retirement"

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