Tag: income rider

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Annuities Fixed Index Annuities Retirement Income Planning

Add an Income Rider to Your Fixed Index Annuity to Create a Retirement Paycheck

Retirement Income Center

As stressed in the last three week’s posts, Where Have All the Pensions Gone?, A Retirement Paycheck is Essential, and No Pension? Create Your Own, we need to know that when we stop working, we will receive a predetermined monthly payment, i.e., a retirement paycheck, for the rest of our life, and, if married, our spouse’s life. Furthermore, due to its inadequacy and uncertainty, this monthly payment needs to be in addition to whatever Social Security benefits we may receive.

Per last week’s post, No Pension? Create Your Own, a retirement income planning strategy that’s becoming more widely used the last few years is the addition of a rider, or endorsement, to a fixed index annuity to generate a retirement paycheck. The concept of fixed index annuities isn’t new to readers of Retirement Income Visions™. This topic has been featured for the last five months, beginning with the July 11, 2011 post, Shelter a Portion of Your Portfolio From the Next Stock Market Freefall.

Up until now, the fixed index annuity strategy has been presented as a conservative, tax-deferred investment approach to obtain (a) higher interest rates compared to similar-duration CD’s, (b) a higher potential rate of return than traditional fixed annuities, and (c) downside protection. As discussed in several posts, greater potential return is available as a result of interest crediting being tied to the performance of one or more stock market indices. Fixed index annuities also offer downside protection since interest crediting is never less than zero, even when the return of selected stock market indices is negative.

When you purchase a fixed index annuity, although you will realize all of the benefits mentioned in the previous paragraph, you won’t create a lifetime retirement paycheck unless you also apply for an optional income rider when your retirement income planner submits your application. An income rider, like all insurance contract riders, provides coverage that’s in addition to, and isn’t included as part of, the base contract. Since the features of the income rider aren’t included in the base contract, an additional charge must be paid to the life insurance company in order to obtain the benefits associated with the rider.

Income riders aren’t available with most fixed index annuities. In a search of 484 products, only 182, or 37.6%, offer an income rider. It’s important to keep in mind that all fixed index annuity income riders aren’t created equally. When available, each fixed index annuity income rider has its own specifications for determining the amount of income that the annuitant(s) will receive when the rider is activated. In addition, every life insurance company that offers an income rider reserves the right to change the specifications for products offered to new applicants.

How does a fixed index annuity income rider work? Specifically, how can it be used as part of a retirement income planning strategy to create a retirement paycheck? Next week’s post will be the first in a series of posts about this topic.

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Annuities Fixed Index Annuities

How to Get Interest Credited to Your Fixed Index Annuity When the Market Declines

Retirement Income Center

Last week’s post, Don’t Neglect Your Fixed Index Annuity Fixed Account, made the point that you’re not guaranteed to receive interest crediting with the majority of fixed index annuity indexing methods due to the fact that interest is only credited when the result of the calculation is positive. Per the post, one way to obtain interest crediting in the event of negative performance of your chosen index or indeces, is to allocate a portion, or perhaps all, of your fixed index annuity to the fixed account.

Per last week’s post, to the extent that you choose the fixed account, you will receive three benefits unavailable from traditional indexing methods: (1) guaranteed return, (2) pre-determined return, and (3) opportunity to offset a portion or all of an income rider charge in the event of a negative indexing method return. While the predetermined annual return is generally very favorable to that of a one-year CD, it is nonetheless modest, typically in the range of 1% to 2% these days.

Recognizing the fact that (a) the performance of traditional indexing methods, e.g., annual point-to-point cap, monthly point-to-point cap, and monthly average cap, can be negative and result in no interest crediting and (b) fixed account returns, while positive, are currently low, two life insurance companies have introduced an indexing method that favors negative stock market index performance. The method is called the inverse performance trigger.

Currently available through the Midland National Life MNL Endeavor and North American Performance Choice fixed index annuity series, with six and four different products, respectively, interest crediting of pre-determined specified percentages will occur when the performance of the stock market index associated with the inverse performance trigger indexing method is zero or negative. North American’s Performance Choice series inverse performance trigger uses the S&P 500 annual point-to-point cap method to measure performance. Current annual interest crediting for its four products, which ranges between 2.5% and 4.6%, is almost identical to its traditional annual point-to-point interest crediting amounts.

To demonstrate the inverse performance trigger indexing method, let’s suppose that you purchased a fixed index annuity on October 1, 2010 that offers the inverse performance trigger tied to the S&P 500 annual point-to-point cap method as one of its indexing method choices. Let’s further assume that you allocated 100% of your contract to this selection. In order to determine whether you would receive the predetermined interest crediting on your contract anniversary on September 30, 2011, you need to compare the S&P 500 price on September 30, 2011 to October 1, 2010. If the price on September 30, 2011 is less than or equal to the price on October 1, 2010, you will receive the specified interest crediting.

In our example, the price of the S&P 500 on September 30, 2011 was 1,131.42 and on October 1, 2010 it was 1,146.24. Since the September 30, 2011 price was less than the October 1, 2010 price, interest would be credited. It makes no difference that the price on September 30, 2011 was only 14.82 points, or 1.3%, less than the price on October 1, 2010. The full amount of interest would be credited to your fixed index annuity contract.

Given the fact that (a) traditional indexing methods can result in no interest crediting in a particular year and (b) fixed account returns are currently low, I would expect to see more fixed index annuity products offer the inverse performance trigger as one of their indexing method choices.

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Annuities Fixed Index Annuities

Don’t Neglect Your Fixed Index Annuity Fixed Account

Retirement Income Center

Last week’s post, Diversify Your Fixed Index Annuity Indexing Methods discussed four basic strategies that you can use to diversify your fixed index annuity indexing methods to reduce the pressure of picking the “winning horse” and improve your chances for obtaining interest crediting in a particular year. One of the strategies, allocation of accumulation value to the fixed account, is the topic of this week’s post.

Per last week’s post, unlike indexing methods that are generally tied to the performance of a stock market index, the fixed account credits a predetermined fixed interest rate for the percentage of your fixed index annuity that is allocated to this investment choice. The fixed account offers three advantages over traditional index crediting methods

  1. Guaranteed return
  2. Pre-determined return
  3. Opportunity to offset a portion or all of an income rider charge in the event of a negative indexing method return

Guaranteed Return

Even though you will improve your chances for obtaining interest crediting by implementing one of the first three fixed index annuity indexing method diversification strategies per last week’s post, i.e., select multiple methods, choose a blended index if available, or purchase multiple fixed index annuity contracts, you won’t be guaranteed to receive interest crediting in a particular contract year. This is due to the fact that interest is only credited with the vast majority of indexing methods when the result of the calculation is positive. When you choose the fixed account, you will receive a guaranteed return no matter how any of the available indexing methods perform.

Pre-Determined Return

In addition to being guaranteed, your return will be a pre-determined percentage of accumulation value allocated to the fixed account. Although the return is usually modest, typically in the neighborhood of 1% – 2% these days, it generally exceeds 1-year CD rates. Furthermore, there is also a minimum guaranteed fixed interest rate for the fixed account that’s generally 1%.

Opportunity to Offset a Portion or All of an Income Rider Charge in the Event of a Negative Indexing Method Return

While it’s true that you will never receive less than 0% interest crediting when the performance of your chosen indexing method is negative in a particular year, it’s possible that the accumulation value of your fixed index annuity will decrease as a result of an income rider charge. Although it’s optional, it’s common to add an income rider to a fixed index annuity. The purpose of this rider is to provide you and a joint annuitant, if applicable, with a pre-determined guaranteed income stream that you can turn on generally beginning one year from your contract date, with the amount of income increasing the longer you defer your income start date.

In order to offer this feature, life insurance companies assess a charge. It’s calculated as a percentage of either the accumulation value or the income account and is generally in the range of 0.6% to 0.95%. The income rider charge is deducted from the accumulation value. When the performance of one or more indexing method(s) is (are) negative, the income rider charge will result in a decline in the accumulation value. This can also occur when the performance during a particular contract year is modest.

By allocating funds to the fixed account, you have the ability to offset a portion, or potentially all, of the income rider charge in a given year in the event that the performance of the portion of your accumulation value that is allocated to one or more chosen indexing methods is negative or modest. The amount of the offset will depend upon the amount of the charge and the percentage allocated to the fixed account. The tradeoff is that your interest rate crediting may be less than the returns from one or more indexing methods when the latter’s performance is superior to that of the fixed account.

Don’t neglect the fixed account when choosing or changing your fixed index annuity allocation methods. When selected, you will receive a guaranteed, pre-determined rate of return. Furthermore, to the extent that you include an income rider with your contract, it will offset a portion, or potentially all, of your income rider charge in the event of a negative indexing method return.