Last week’s post made the point that, in addition to the accumulation value of a fixed index annuity (“FIA”), there’s a value that can be calculated and attached to the future income stream from an income rider. Furthermore, unlike the accumulation value of your FIA that will change over time, unless you make additional investments or take non-income withdrawals, the amount of your lifetime income withdrawals are predetermined and are contractually guaranteed.
So if the amounts of lifetime income withdrawals are known at the time of purchase of your FIA, why don’t life insurance companies show the present value of the withdrawals on annual statements? The reason it’s not done is because there are several unknowns throughout the life of the contract that can affect the amount and duration of the income payout. There are two types of unknowns: amount and duration variables.
There are two variables that can increase or decrease the lifetime retirement payments (“LRP”) from an FIA:
- Additional investments
- Non-income withdrawals
Additional investments will increase LRP’s while non-income withdrawals will decrease LRP’s. In addition, the timing of additional investments and non-income withdrawals relative to the issue date will directly affect the LRP amount.
Generally speaking, the sooner that additional funds are added to an existing FIA contract, the larger the income payout. This can happen in two different ways as follows:
- The sooner additional investments are made, the more time there is for the funds to increase the income account value and the ultimate LRP.
- To the extent that the FIA offers a premium bonus and the premium bonus provision applies to additional investments, this will also increase the income account value and LRP.
Timing of non-income withdrawals will also affect the LRP amount. This can happen in three different ways as follows:
- The sooner that the withdrawals occur, there will be a reduced income account value growing for a longer period of time.
- The sooner withdrawals occur, the greater the surrender charge which will increase the withdrawal amount and decrease the income account value and LRP.
- To the extent that a premium bonus has been paid, non-income withdrawals will result in a recapture of part, or all, of the premium bonus if they occur during a stated period of time, generally the first ten years of the contract, which will in turn reduce the income account value and LRP.
Let’s assume that your FIA will never have any additional investment or non-income withdrawal transactions. In this case, the LRP’s will be the amounts beginning at different ages per the illustration that was prepared for you when you purchased your FIA. Why doesn’t your FIA statement show the present value of your LRP in this situation?
The answer is unknown duration. While the LRP amount is known, its duration isn’t. FIA income withdrawal amounts are paid for life and no one knows when you’re going to die. If you’re married, payments are made for the duration of the lives of both spouses and no one knows when the surviving spouse will die.