There are many different annuities offering the Income Rider, and with many variations, which has made it very difficult to determine which one is the best. Let’s uncover the details and find out what you need to be looking for.
Fixed Index vs. Variable
Overall the fixed index annuity with an income rider will provide a higher income based on guarantees alone, than the income riders within the variable annuity industry.
One thing to not forget within the design of the income rider is if the actual account value outperforms the guaranteed income rollup, many of the contracts today will reset the income account to reflect the higher account value. This usually occurs on the anniversary date of the contract, although some contracts will with step up the income account sooner, if the account value moves higher.
If you happen to catch a strong market right after starting an annuity, this is the one area where a variable annuity income rider could outperform the fixed index annuity income rider, but there are more things to consider.
Components of an Income Rider
The vast majority of consumers would of course like the highest possible income guarantee that they can get, assuming all other things are relatively equal, such as company strength, surrender charge period, fees, etc. So let’s dive into the MAJOR COMPONENTS that need to be considered when choosing an Income Rider. Since the insurance companies have now had a number of years to develop the income rider, we are seeing some pretty wide variations, and the average consumer has no way of knowing if their getting a good deal or not, other than trusting the agent they are dealing with and we all know how that can turn out.
So why wouldn’t an agent always show you the best product available?
- They can’t get that particular product because of the Field Marketing Organization that they run all their business through doesn’t carry that particular company, or have access to it.
- For some reason the agent can’t get licensed with a company because of background issues. Carriers are very strict today and if an agent has had bad credit, disciplinary actions etc., they will not contract them.
- An agent has his favorite company and really doesn’t care if it’s the best. Funny I once knew of an agent who used only one company regardless of the situation, kind of like everyone walking out of a shoe store with the same shoe.
- Company Trips and Incentives. Many carriers today will provide additional benefits to agents such as company trips with certain amounts of volume, and that can influence the product being recommended to the client.
- Dare I say it commissions. One product may pay the agent a higher commission than another, which again will determine which one they will show you.
Here at WCFS Annuities we have access to every single Index Annuity carrier available today and have reporting capability to show exactly how a particular company stacks up to the competition based on your exact situation.
Rollup Rate or Income Account Interest Rate
At first glance this would seem to be the most important factor in choosing between annuities. This is of course is very important, but as you will see there are other factors that will really differentiate income riders. We will now look at the variations that are available in the industry.
The consumer has basically three choices, a guaranteed rate, a rate determined by a blend of a guaranteed plus index gains, and a rate purely determined by index gains. Wow how’s that for bringing in the confusion, and we are just getting started.
Fixed Rate, Compounded or Simple. This is very straightforward and within the industry as of the time of this writing, we are now seeing compounded rates between 4 to 6.5%, and simple interest rates as high as 10%. With compounding, the gains receive the credited interest rate as well, where with simple, interest on the initial deposit only is calculated and added to the value each year. The nice thing about the guaranteed rate, is you can determine exactly your income at a future date with a specific deposit. This really helps when setting up a baseline income that will be needed for retirement.
Fixed Plus Index Gain. How this works is the company will guarantee a fixed rate of 3 to 5% to the income account plus either the percentage of the index gain of the account value, or the dollar amount of the index gain of the account value. This last minor distinction can make a big difference. The index gain percentage is the preferred option since the income account will nearly always be higher than the account value.
This strategy does have the potential for higher rollup gains than the guaranteed fixed, but it could also be lower if the indexes do not perform well. This strategy may be better if future income is the goal, but more as an added benefit. Maybe use the minimum guarantee to satisfy baseline expenses, and if the indexes do well your ahead, or if you just want more growth potential.
Index Gains Only. This is the least popular of the strategies available today and only a few products offer this. If the indexes do well, this method can really grow the income account, since most of the companies offering this will apply a multiple of say 1.5 times the index gain. This strategy may be good if there are funds that are there for future income that may or may not be needed, but having some type of income guarantee is still desired.
Income Account Bonus
This is where things start getting muddy and where a client can really get led down the wrong road. The vast majority of index annuities today provide first year bonuses of 5 to 10%. The bonus is usually added to account value and the income value at the same time, although there are a few that don’t add the bonus to the income account. (Isn’t this fun?)
A few of the companies out there have decided to really throw out the bait and advertise 25 to 45% first year bonuses to the income account, which don’t forget is really just a number being used for calculation purposes. The average consumer would immediately think that an income rider with that high of a bonus has to be the best deal out there, and many times end up with, in many cases, a product that underperforms a better product over a wide margin over time, and the client ends up with a much lower income.
The rare times that we have seen this type of annuity to be the best for the client are when a client needs to start income right away, but even then there are additional strategies of when to actually exercise the income rider that can make a huge difference for the client over time. (More on that in another post.)
Remember this: A bonus is important but not the most important factor when choosing an income rider.
The Payout Rate
This is by far one of the most important factors to consider when choosing an Income Annuity and it is the least discussed by most companies. It truly is where the rubber meets the road. I have seen a considerable variation in this area and this makes a huge difference for the client. This is also where the index annuity is superior overall than the variable annuity.
Typically the payout rates will increase by a certain percentage, as the client gets older. Some companies will set an age band of 5 to 10 years with the same rate, where some companies will increase the payout each year.
Just to show you how important this is, if we take an income account value of say $250,000 and a person chooses to elect their income. Say we have a couple that is now age 65.
- Annuity #1 pays out 5.5% so they receive $13,750.00 per year
- Annuity #2 pays out 5% so they receive $12,500.00 per year
- Annuity #3 pays out 4.5% so they receive $11,250.00 per year.
Can you see how important this is? Annuity #3 pays out an income that is 18% lower that Annuity #1 just because of a small detail that is very easily overlooked or not pointed out as important to the consumer. You can have exciting income account growth but have it nullified by a low payout rate.