In my last article, I explained how a client can use pro-rata withdrawals to extract money from their annuity before turning on withdrawals under the rider. This technique can be used to dramatically increase your client's ultimate cash flow. Now, I'll explain some of the more traditional ways your client can take withdrawals using the annuity's income rider.
In order to begin withdrawals under the terms of the income rider, the client must submit a signed election form to the insurance company. This form tells the insurance company that the client wants to begin a series of withdrawals. I refer to it as "electing" withdrawals under the rider.
When a client elects withdrawals under the rider, it does three things:
1) Starts an uninterrupted series of payments to the annuitant.
2) Locks in the payment percentage based on the annuitant's attained age as of the first payment date.
3) Stops the roll-up rate on all interest accumulated in the income benefit base on the first payment date.
Please note: Fixed and/or indexed interest will continue to be credited to the policy's actual accumulated value throughout the income withdrawal process.
Rider income withdrawals can be taken several ways, depending on the company and rider selected. The most common methods are income withdrawals and lifetime income withdrawals. These withdrawals are not subject to withdrawal charges as long as they do not exceed the amount allowed under the rider. Of the two, lifetime income withdrawals are more commonly selected.
Income withdrawals are a certain percentage or dollar amount of future withdrawals and normally continue until the cash value or the income benefit base is depleted. Lifetime income withdrawals continue until the death of the annuitant or the death of the last surviving spouse, if a joint payout has been selected.
With either method, payments are taxed like regular withdrawals from the annuity. For non-qualified accounts, any interest withdrawn from the annuity is taxed on a last in, first out (LIFO) basis. For qualified accounts, the full payment amount from the annuity is taxed. And payments from a Roth IRA are tax-free, if withdrawn under Roth IRA rules.
Here are examples of income and lifetime income withdrawals. Each example features an annuitant aged 60. The annuitant's accumulated value at the time of the first income withdrawal is $100,000, and the income benefit base is $107,200.
Example No.1 -- 7 percent income withdrawal
Income withdrawals continue until the annuity's income benefit base or the accumulated value has been depleted, whichever event happens last.
In this example, the income withdrawal is assumed to be at 7 percent, so the annuitant receives a payment each year of $7,504. To reach this amount, multiply 7 percent by the income benefit base of $107,200. Each year, $7,504 is deducted from the income benefit base, which provides the annuitant with a level payment for a minimum of 14.2 years.
Each year, the same amount of $7,504 is subtracted from the annuity's accumulated value. The annuity continues to receive interest credits. If no excess withdrawals are taken, this payment stream will never be less than 14.2 years. Because this withdrawal stream is based on movement of the index or fixed interest credits, it could potentially last 15 years or more.
Example No. 2 -- 5 percent lifetime income withdrawal
The most popular withdrawal method is a 5 percent lifetime income withdrawal. Once the annuitant elects to receive lifetime income withdrawals under the terms of the rider, they will receive payments as long as they live.
In this example, the annuitant will receive a lifetime income withdrawal of $5,360 for the remainder of their life. Again, to reach this number, multiply 5 percent by the income benefit base of $107,200.
Example No. 3 -- 4.5 percent joint lifetime income withdrawal
Joint lifetime income withdrawals are attractive to married couples.
In this example, it is assumed the husband is 62 years old and the wife is 60 years old. They turn on lifetime withdrawal payments under the rider, which equal $4,824. To reach this number, multiply 4.5 percent by the income benefit base amount of $107,200. The payment is based on the younger spouse's age at the time of the first payment, and will continue as long as the last surviving spouse is living.
Example No. 4 -- 4 percent lifetime income withdrawal with 3 percent annual increase
This is a variation of the second example. The annuitant decides to turn on lifetime income withdrawals under the rider and receive a payment of $4,288. Again, multiply 4 percent by the income benefit base amount of $107,200. This withdrawal amount will increase by 3 percent compound interest each year and is received as long as the annuitant is living.
The cost for this option is 1 percent lower initial than the payout factor. The 3 percent annual increase stops when the accumulated value of the annuity is depleted. The withdrawal will continue at the prior year's payment amount.
Part 5 of this series will discuss additional, unique ways to receive dollars from an income rider. If you would like to receive a carrier-approved consumer tool to demonstrate this concept, contact me through the forum and provide your contact information. Sign up as a fan and you'll automatically receive future articles from my Annuity Notebook.
This article is not intended to give tax or legal advice and is for general educational purposes only. This article is for agent use only. Features and/or Riders may not be available in all states or with all insurance carriers and may vary from state to state. Please check the product/rider disclosures and policy for actual terms and conditions. You are encouraged to seek independent legal and/or professional advice depending on your client's individual circumstances.
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