Part 1 of this post explained the benefits of attaching an income rider to a fixed index annuity (“FIA”). It also discussed the charge for this rider, including how it’s calculated. Now we come to the crux of the matter – is a FIA income rider charge worth it?
Before answering this question, I want to make it clear that the charge doesn’t reduce the lifetime income, or lifetime retirement paycheck (“LRP”) amount that you will receive. It’s deducted from the accumulation value of your FIA, or value of your FIA before any applicable surrender charges. As explained in Part 1, the income account value is used to calculate the amount of your LRP and is separate and apart from the accumulation value of your annuity contract.
Not to state the obvious, however, when you purchase something for yourself, you generally do so only if you plan on using it or benefiting from it in some way. This applies to a FIA income rider. The reason that people purchase a FIA with an income rider is to obtain the security that no matter what happens with the rest of their investment portfolio, subject to individual life insurance company claims-paying abilities, they will receive guaranteed lifetime income beginning at a flexible income start date, with the amount of income increasing the longer the start date is deferred.
Furthermore, per Part 1, one of the five benefits offered by an income rider is the ability to calculate the LRP amount that you will receive beginning on a specified future date on the date of purchase. When you invest in a FIA and tack on an optional income rider, your retirement income planner should be able to show you (a) the amount of annual income that you will receive beginning on different dates with specified initial and additional purchase amounts and (b) the amount of your projected retirement income need that will be met by your FIA income.
Assuming your goal is to receive a specific amount of income each year beginning at a specified future date, you won’t withdraw funds from the accumulation value of your FIA before or after your income start date. If you do so, the income account value will decrease by the amount of your withdrawals, decreasing your LRP amount.
Assuming you won’t be withdrawing funds from the accumulation value of your FIA and you will only be using your FIA to generate lifetime income, the accumulation value will be of secondary importance to you during your lifetime. If there’s a chance that you may take withdrawals from your accumulation value, you shouldn’t be purchasing an FIA with an income rider.
With an income rider, once you start receiving income from your contract, you will continue to do so for the rest of your life even if the accumulation value has been reduced to $0 as a result of income withdrawals and income rider charges. Assuming that you use your income rider as intended, receiving lifetime income without taking any withdrawals from the accumulation value of your contract, the primary benefit of your contract’s accumulation value is as a potential death benefit to your beneficiaries. Keeping in mind that income distributions reduce accumulation value, the latter may be minimal or potentially depleted in the event that there have been ongoing income distributions for many years.
Assuming (a) you value the five benefits of a FIA income rider presented in Part 1, (b) you understand that the income rider charge won’t affect the amount of your lifetime income, (c) you recognize that the accumulation value is of secondary importance, and (d) the income rider charge is competitive with other FIA income rider charges assessed by similarly-rated life insurance carriers that will pay a similar amount of income, you will probably conclude that the income rider charge is a small price to pay to obtain the unique combination of benefits offered by a FIA income rider.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.