When the first variable annuities income riders where introduced over a decade ago, my sons and I did a lot of research on how they worked. We found that most agents were misinformed and were misleading their clients.
They did not understand that the accumulation account and the guaranteed lifetime income account are different accounts, with different purposes. The accumulation account is money the customer can touch. The income account is just that – an account from which the guaranteed lifetime income is formulated.
The account holder cannot touch this money. The account does not exist in any tangible form. There is an annual fee currently around 4 percent-5 percent per year.
Like the variable annuity, the income benefit rider for a fixed indexed annuity
is an optional income rider that, once started, provides a guaranteed lifetime income stream — even if the account balance falls to zero.
There is an annual fee, currently around 1 percent per year, and you earn an enhanced rate each year you don't take any distributions and delay the start of the guaranteed lifetime income benefit. These enhanced rates can range from 5 percent to 8 percent per year for a compound accumulation, or 10 percent per year for a simple accumulation.
These enhanced rates only apply to a separate and hypothetical income account value. As stated earlier the income account value is not real money. You can't access it, and it only exists until such time as you terminate the annuity or rider, or start your lifetime income benefit.
The ads and solicitations for indexed annuities
(and variable annuities) with the income benefit riders
are therefore very deceptive in that the rate of return they are referring to is not a real rate of return. It is merely the imaginary enhanced rate of return on a hypothetical account value.
In other words, they are correct in that your income account value will earn that amount, but they are deceptively false in that your real account value will not grow at that rate.
We also believe that income riders are being oversold and are an unsuitable proposition for most people. While they are suitable in certain circumstances, the cumulative annual lifetime cost alone is prohibitive when compared to the potential benefits received.
Considering these deceptive sales practices, is there any question why consumers, consumer advocates and regulatory organizations are skeptical of what we are recommending to our clients?