The vast majority of annuities being sold today are being sold with an income rider. Unfortunately this may not always be in the best interest of the client, but for the salesman it is easy to convince someone that this is a good deal for them. Let’s uncover why you may not need an income rider and instead may want to consider purchasing an annuity with solid crediting rates, which may benefit you and your family much more.
Keep in mind the way an income rider works is there is a separate account that is for an income calculation only that grows at a specified rate. With crediting rates at 6 or 7% this has a tremendous appeal to many, especially if it grow for 15 to 20 years. The problem is for all but a few annuities, it is just a number used for calculation purposes only, and really has no value whatsoever if the guaranteed income is never exercised.
Why do we say you may not need the rider? Let’s see how an income rider works. Let’s say a person invests $100,000 with a 10% bonus on the money going into the index annuity with an income rider that rolls up at 7% per year. Let’s say the couple is both 65 and decide to take the income at age 70 with a joint payout. At age 70 the guaranteed income value will be $154,280.69. Let’s assume the joint payout rate is 5%, so they will receive $7,714.05 per year as long as either person is still living.
It’s All About the Crediting Rate
Here is where it gets interesting and it all has to do with the crediting rate of the index annuity. IF the annuity had low crediting rates from the start, which is what we are seeing a lot today, and averaged 2.5% minus the .95% rider fee, then the account value at age 70 may only be around $118,500. If the account continued to average the same return, then the actual account value may go to zero if at least one of the couple is alive at age 88. It would of course still continue the payments as long as they live. So far this doesn’t seem like a bad deal, but the account value will be completely used up a few years past life expectancy.
What happens instead if an annuity with a better crediting rate is used that doesn’t have a rider fee? Let’s say the better annuity averages around 4% with no rider fees. At age 70 the account value would be valued around $133,800. IF the same amount is withdrawn ($7,714.05) as a free withdrawal, at age 88 when the other annuity has an account value of zero, the higher crediting annuity has a value of $73,224. IF the couple both passed on, the family of course will receive that amount rather than zero in the first annuity. In fact one of the two would have to live to age 101, before the account value would actually go to zero in the higher crediting annuity as well.
The Older You Are the Less You Need the Rider
The older the couple is at the time they open an annuity with an income rider, the less the actual benefit of the income rider. In fact they may be paying for something they do not need and it ends up eating up the account value in the future. The reason is they would have to live well beyond life expectancy to receive any value out of the rider, in some cases the rider itself may never provide any value depending upon the payout rates.
Lets look at another example. A couple aged 75 takes out an annuity with the same 10% bonus and a 7% income rider. They wait till age 80 to exercise the guaranteed income. The income account is the same value as the example above except they receive a 6% payout or $9,256.84 per year. If the annuity earned the same low rate as above one of the two would have to live to age 95 before the actual account value goes to zero and the income rider kicks in, which is well past life expectancy. Many contracts will pay a lower payout than this, say 5 or 5.5% at age 80 , which further negates the benefit of the rider.
Before purchasing the income rider let us help you do the math and show you quality annuities that have the highest crediting rates. This could save you and your family thousands of dollars in the future.