I talk to many advisors who simply sell the guaranteed income rider increases on fixed indexed annuities
and variable annuities. That alone creates confusion, as I routinely talk to clients who think they are earning 6 percent or 7 percent on their initial investments. Whether the annuity is being mis-sold or misunderstood remains a topic for another time. What is important is how much leverage the client can create for the assets being deployed for income purposes.
When LIMRA released its fourth quarter industry statistics
, deferred income annuities rose to the fastest-growing segment of the annuity market place. It's easy to understand when you look at the alternatives associated with income riders, especially those that bear market risks.
For example, I placed $500,000 in a deferred annuity for a 55-year-old male. The client deferred income for 20 years (to age 75) and began taking a life with installment refund income option. The annuity produced a $9,015 income for life with a refund of unused premium. Assuming a 5 percent payout factor on an income rider at age 75 with a maxed-out income rider, the client would have to have grown an income rider value equal to $1,620,000. I am not aware of an income rider
that will generate more than three times the initial premium — guaranteed.
It's time to turn the conversation to income, leverage and tax efficiency — not false guarantees of paper value. Our clients need solutions to their biggest fear: outliving their income.