Why you must offer FIAs with an increasing incomeArticle added by Roccy DeFrancesco on August 14, 2009

Roccy DeFrancesco

MI

Joined: May 24, 2006

My Company

I've recently completed my review of what most advisors have not yet seen: a product with an increasing income rider. In fact, while most FIA guaranteed income benefit (GIB) riders will provide a "level" income once activated, it will not increase once started.

"Level" FIA GIB riders

If a 60-year-old client funded \$500,000 into my favorite FIA with a 5 percent bonus, and let it accumulate at a guaranteed 7 percent rate of return in the accumulation account, the account value at age 70 would be \$1,032,754.

If this client activated the GIB rider at age 70, the annual income benefit for life would be \$61,965 (6 percent x \$1,032,754). If the client lived until age 89 years old, the total income received would be \$1,239,300, which is great.

"Increasing" income rider

I've recently completed my review of what most advisors have not yet seen -- a product with an increasing income rider. Let me just tell you how this product works, because it is quite a bit different than level income products in the marketplace.
1) The guarantee is the highest of 4 percent or whatever the FIA product actually credits each year. Every year, the insurance company determines with what the actual account value is credited. If that amount is more than 4 percent, that amount will be credited to the guaranteed roll up/accumulation account, which is used to calculate the GIB.

2) When the income phase is started, the annuity owner will start with a base income payment just like a level payment product; however, every year that the actual account value in the FIA is credited with a positive return, the income payment will increase by the same percentage return.
For example, if the income stream starts at \$61,965 (the same as the level product example) and in year two the actual index was credited with a 5 percent return, the next year's income benefit from this product would be \$61,965 x 5 percent = \$3,098 + \$61,965 = \$65,063.

Once the income payment increases (which it can do in every year), the payment will never go backwards.

The numbers

The following chart illustrates the power of the increasing income FIA versus a level income product. I assumed what I believe is a real world variable return each year to drive the numbers in the following chart. I will not explain the numbers due to space issue, but you can contact me via the forum below for more details.

 Age GIBIncreasing Income GIBLevel income 70 \$60,148 \$61,965 71 \$60,148 \$61,965 72 \$65,562 \$61,965 73 \$70,807 \$61,965 74 \$70,807 \$61,965 75 \$75,763 \$61,965 76 \$81,824 \$61,965 77 \$86,734 \$61,965 78 \$86,734 \$61,965 79 \$94,540 \$61,965 80 \$102,103 \$61,965 81 \$102,103 \$61,965 82 \$111,292 \$61,965 83 \$120,196 \$61,965 84 \$120,196 \$61,965 85 \$128,609 \$61,965 86 \$138,898 \$61,965 87 \$147,232 \$61,965 88 \$147,232 \$61,965 89 \$160,483 \$61,965 Total Income \$2,031,411 \$1,239,300

If you are selling FIAs, and specifically FIAs with a GIB rider, you must learn this product. Besides that, it may be a good fit for many clients from an E&O avoidance point of view; I think you should be offering this product.

The biggest problem with this product is to fully understand how it works. While I've made it sound terrific in this article, it is not a good fit for everyone. There are products that are a better fit for some clients depending on their circumstances and goals.

Illustrating the return of an increasing income product

It's really difficult to illustrate this product. Unlike level guaranteed return products (such as 7 percent a year), this product will return higher of 4 percent or whatever the actual account value in the FIA is credited with every year. That could be a number slightly more than 4 percent, or it could be much higher, say 7 percent to 8 percent.

The income phase is also difficult to show the client what their "guaranteed" income will be, because we don't know what the actual positive returns will be in the future.

In order to sell this very powerful product, what you really need is a calculator that allows you to input a hypothetical variable rate of return both for the accumulation period and during the payment phase.