Lifetime Income Riders Explained

Lifetime Income RidersAre you concerned about having enough money for a comfortable retirement? Income riders may be an effective vehicle for lasting financial security. When paired with the right annuity, an income rider can provide a steady income stream for the rest of your life. 

What is an Income Rider?

An income rider is an addition to a financial product. It’s an extra feature which may be purchased as a complement to an annuity contract. The income rider is issued along with a base contract. All income riders are different from each other.

Moreover, this solution is also a kind of annuity guarantee. Say you elect to have this additional rider. It’ll grow at a predetermined rate guaranteed for a specific amount of time to provide a lifetime income in the future. The contract’s term of understanding will specify the income rider’s length of duration and any terms of flexibility.

Income Rider Parts

Income riders do vary. Nonetheless, generally speaking, they come with three components:

  • Rate – The predetermined growth percentage which the insurance carrier guarantees during the contract’s period of deferral
  • Period – How long the rate is guaranteed during years of deferral
  • Payout – The actuarial payout percentage which the income stream is based on

You’ll receive your specified future income without surrender charges and without having to annuitize your contract. This allows for you to maintain more control of your money during the accumulation as well as the distribution of your assets.

Does an Income Rider Have to Be Attached to a Product?

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Yes. With any income rider there must be a product associated with it. The riders discussed on this website are associated with fixed and fixed index annuities. There are income riders available on variable annuities. But neither are they recommended nor are they explained or discussed on this website. 

With a product income rider there are three account values:

  • Cash Value or Accumulation value
  • Minimum Guaranteed Contract Value
  • Income Value (Rider Value)

The income value or rider value is not a real value. It’s a number in which a future income percentage will be based on. When someone tells you they can get you “a 7% guaranteed rate,” what they’re saying is that they can get you a 7% guaranteed income value growth rate. Which means your income value will go up by 7% every year. Remember, this is not a real value. This is just a number used to calculate the income percentage you will take in the future.

How Do Income Riders Function?

The guaranteed growth rate varies among annuities and insurance companies. Generally speaking, many insurance carriers guarantee it for 10 years. Some contracts may offer the capacity for extension if you choose to “target date” longer than this 10-year period. 

When you attach an income rider to an annuity, the insurance company creates a “side account” called an income-only account. It’s credited to your income-only account, or the value from which you’ll draw your lifetime income source. It’s used for only that purpose. You may hear of this value referred to as an “income value” or an “income account value.”

The growth rate is not credited to the money in your annuity – in other words, money which can be withdrawn or able to be passed to beneficiaries. When you begin taking an income stream from your income rider, your insurance company will base its payout on your age at this point. Remember, most income riders also come with fees, which differ from insurance company to insurance company. 

Income Rider Benefits

Benefits will vary depending on the annuity with which you pair your income rider. When paired with the right fixed index annuity, an income rider can provide many consumer benefits:

Lifetime Income Riders

  • Your income will never run out
  • Income will never be fully depleted even if your account reaches zero
  • Can have cash value growth while you’re receiving income
  • Gives protection against market changes

Does an Income Rider Come at a Cost?

Once again, it depends on the income rider, the product it’s added onto, and the insurance company issuing the product. Some riders cost 0% while others cost 3% or even more. 

When learning about how an income rider’s fees are calculated, three questions to consider are:

  • What is the fee?
  • How is this fee calculated?
  • Is it done with a cash value calculation or an income value calculation?
  • Are fee calculations based on income account value or accumulation or cash value?

For example, the fee may be calculated based on the income account value. The fee would increase per year while you’re in the deferral period – it’d based on the income account value’s growth percentage. 

As a result, your cash value would decrease more quickly. Then your heirs would receive an annuity contract of significantly lessened value. Other income riders may come with cash value-based fees while others are without any internal fee structure.

Are Income Riders as Good as Advisors Say They Are?

It all depends on the rider the advisor is recommending and why they’re recommending it. An income rider can work well when used with qualified accounts of large sums of money, including:

Lifetime Income Riders

  • 401(k)s
  • Tax sheltered annuities
  • Thrift savings plans
  • 403(b)s
  • IRAs
  • Other similar accounts

The reason is that most of the time, the income choices available within these types of retirement accounts can be limited. In some cases, they’re nonexistent. A very important thing to recognize is that more qualified money means more taxes when you liquidate those accounts. Say you were to take a large qualified account and liquidate all the money in that account in the same year. Then you could increase your income tax bracket to the next level for that year.

That’s why it can make sense to disperse these accounts in the form of income rather than all at once. Also, when using an income rider, you have the power of guaranteed account growth and a guaranteed lifetime income in the future that you can’t outlive. This will allow you to spread out the taxes over your lifetime and maximize the tax deferral, triple compounding, and the flexibility of access to emergency funds when needed. 

Do you think an income rider may be right for your retirement needs? Connect with an independent financial professional for guidance – use our Find a Licensed Advisor section to locate and contact someone. And if you have any questions, call 877.476.9723.

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