Annuities Fixed Index Annuities

5 Things You Receive From a Fixed Index Annuity Income Rider – Part 1 of 2

As the saying goes, it’s better to give than to receive. With this in mind, the last three week’s posts focused on what you don’t receive when you purchase an income rider with a fixed index annuity, or “FIA.” With Christmas and Hanukkah just behind us as I write this week’s post, it’s time to take a look at what you receive from this optional addition to your FIA.

Let’s start with some basic terminology. Although many life insurance companies refer to it as an income rider, you will also see the phrase, guaranteed minimum withdrawal benefit rider, or “GMWB” rider, for short. The latter terminology is simply another name for an income rider.

FIA income riders are a dream-come-true for a retirement income planner like me since it enables me to offer a unique solution for meeting clients’ income needs that isn’t available elsewhere from other investment products. Specifically, a FIA income rider has the following five features that, when taken as a whole, cannot be duplicated by any other investment:

  1. Guaranteed, subject to individual life insurance company claims-paying abilities, lifetime income or lifetime retirement paycheck (“LRP”)
  2. Flexible LRP start date
  3. Potential for increased LRP amount
  4. Ability to calculate an LRP amount on the date of purchase
  5. Ability to adjust initial and ongoing investment amount to match one’s income needs.

While all features except for #2 are available with other types of fixed income annuities, there are no other investment products that offer all five in one package. The first two features are the subject of this week’s post, with features #3 – #5 discussed in Part 2 next week.

Guaranteed Lifetime Income

A FIA income rider is designed to create lifetime income, or a lifetime retirement paycheck, or “LRP.” Moreover, since it’s being paid by a life insurance company, it’s intended to be a guaranteed payment, subject to each individual company’s claims-paying ability. While this is a wonderful feature from a retirement income planning perspective, it’s one that’s common to all fixed income annuities. As such, in and of itself, it isn’t a unique feature of FIA income riders.

Flexible LRP Start Date

When it comes to lifetime income payments, there are three types of fixed income annuities that offer this: (a) single-premium immediate annuities, or “SPIA’s,” (b) deferred income annuities, or “DIA’s,” and (c) fixed index annuities, or “FIA’s.” The LRP start date for SPIA’s is one month after purchase. LRP’s from DIA’s are deferred to a contractually specified date that can be any time beginning at least one year after date of purchase. Whether you purchase a SPIA or a DIA, your start date is locked in when you make your investment.

When you purchase an income rider with a FIA, on the other hand, your LRP start date is flexible. Furthermore, unlike SPIA’s and DIA’s, you aren’t required to lock in your start date when you purchase your FIA. With all FIA’s, there’s a one-year waiting period between the effective date of the income rider and the date when you may begin to receive your LRP. The effective date of the rider is always the same as the effective date of your FIA contract since an income rider must be added to your contract when your purchase a FIA. In addition to waiting a year to begin your LRP, with most FIA’s, you must also be at least 50 years old.

The foregoing two features, in and of themselves, would make for a very nice retirement income planning solution. As you will learn next week, this is just the tip of the iceberg that distinguishes FIA income riders as a powerful and unique addition to an otherwise conservative investment product with the potential for meeting a retiree’s ongoing income needs.

Annuities Fixed Index Annuities

Your Fixed Index Annuity Income Rider – What You Don’t Receive – Part 1 of 2

As stated in last week’s post, while a fixed index annuity has several unique conservative and desirable investment features, assuming your goal is to create a lifetime retirement paycheck, you need to apply for an optional income rider when your retirement income planner submits your application. As pointed out last week, income riders are currently available with less than 40% of all fixed index annuities.

What exactly do you receive when you purchase an income rider with your fixed index annuity? How does it work? How can it be used as part of a retirement income planning strategy to create a lifetime retirement paycheck?

Before we talk about what you receive when you purchase an income rider with a fixed index annuity, it’s important to understand what you don’t receive. The remainder of this post will begin a two-part discussion devoted to this topic.

In order to understand what you don’t receive when you purchase an income rider with your fixed index annuity, we need to place it in the context of fixed income annuities. A fixed income annuity is the broad class of annuities under which fixed index annuities fall.

One of the unique features that’s associated with a fixed income annuity is the right to annuitize your investment. Per the Glossary, annuitization is defined as the irrevocable structured payout of an annuity with a specified payment beginning at a specified date, paid at specified intervals over a stated period of months or years or for the duration of the annuitant’s and potentially his/her spouse’s and/or other individuals’ lifetime(s) depending upon the payout option selected. That’s a roundabout way of saying that you’re entitled to receive an income stream for a specified length of time.

In addition, when you purchase a fixed income annuity, the timing of commencement of payments can be different, depending upon whether you purchase an immediate or deferred fixed income annuity. With an immediate annuity, payments begin one month after date of purchase. Deferred annuities generally won’t begin making payments for at least 12 months from date of purchase.

Finally, with fixed income annuities, when the income stream as defined by the terms of the annuity contract ends, so does the annuity contract. Unless there’s a refund feature, there’s no accumulation value that’s payable to the annuitant(s) or to his/her beneficiaries.

Now that you have a basic understanding of fixed income annuities, I will continue the discussion regarding what you don’t receive when you purchase an income rider with a fixed index annuity next week when I share with you the unique characteristics of fixed index annuity income riders compared to fixed income annuities in Part 2.