Anatomy of a fixed annuity income rider, Pt. 2Article added by Randy Timm on January 26, 2010
Joined: September 06, 2007
Ranked: #65 (903 pts)
In part one of this series, I explained the difference between a fixed annuity's accumulated value and an income rider's income benefit base. Now I will explain the income benefit base in more detail.
*Note: Throughout this article, you will see the term "income benefit base." This is the special value calculated within an annuity income rider that serves as the basis for future income payments.
Factors that influence the income benefit base
In most situations, a customer will let the income benefit base accumulate until she is ready to take income under the rider. Income riders normally have three distinct phases: accumulation phase, payout phase and extended payout phase.
- The value of the initial income benefit base is first established at the time the contract is issued based on the initial premium.
- The income benefit base is normally increased by any premium bonus. (Most carriers)
- Alternatively, some carriers only increase the income benefit base by using a bonus or enhancement factor. That increase does not increase the accumulated value of the annuity. (Select carriers)
During the accumulation phase, the value of the income benefit base is growing based on multiple factors. Most notable is an accumulation rate, or what I refer to as the roll-up rate. A roll-up rate is normally an interest factor that is applied to the income benefit base on a daily or annual basis. The factor is not applied to the accumulated value or cash element of the contract. The roll-up rate is only applied to the income benefit base, not the accumulated value.
Roll-up rates today range from 4 percent to 8 percent compound interest and up to 10 percent using simple interest. Some income riders do not have a roll-up rate. Note: The roll-up rate is not the sole determining factor when deciding which income rider is better for the client. You need to evaluate the situation of each individual client. In fact, in some situations, a rider with a 0 percent roll-up rate might actually provide better income benefits that a rider with an 8 percent compound interest roll-up.
Most income riders allow the income benefit base to roll-up at the stated rate for the earlier of 10 years or the age at which elected withdrawals begin under the terms of the rider. Regular withdrawals taken before turning on elected withdrawals under the rider with most carriers do stop the roll-up accumulation.
Below is a chart that shows the difference in roll-up rates using compound versus simple interest.
Initial premium $100,000
For clients who want to defer longer than 10 years, some carriers offer different options. Some carriers offer a 20-year guarantee. A small number of carriers will allow your client to extend the roll-up of the income benefit base for an unlimited numbers of years. For example, with the rule of 72, your client could have two times the amount in the income benefit base in 10 years, four times the amount in 20 years, eight times the amount in 30 years and 16 times the amount of the initial premium in 40 years. Normally after 10 years, the company requires the client to elect an optional restart.
Many carriers have a minimum issue age on their income riders of age 40. But, some will allow contract owners under the age of 40 to add these riders to their annuity contract, which makes the accumulation period a very important factor.
Restart is an optional benefit that is normally available after the fifth year but prior to the end of 10 years. It allows the client to continue to accumulate dollars in the income benefit base before taking elected withdrawals under the rider. The restart normally begins a new 10-year accumulation period at the initial guaranteed roll-up accumulation rate. If the accumulated value of the annuity is higher than the income benefit base at the time of restart, then the income benefit base is increased to equal the higher value. At the time of restart, the cost for the rider can increase. Even though the charge for the rider might increase, the guarantee of the accumulation factor at the original roll-up rate is a powerful guaranteed rider benefit. It is important to note that a restart does not add additional surrender charges, nor is any commission paid at the time of restart. Restart is a benefit that is attractive for the customer that wants to continue to accumulate and take advantage of the roll-up accumulation factors built into income riders. The customer must proactively elect this benefit at the time of restart.
Current charges for income riders on fixed annuities range from 0.00 percent to 0.75 percent per year. If an optional restart is elected, guaranteed charges at the time of restart range from 0.75 percent to 5.00 percent. The most common guaranteed charge is 1.00 percent.
There are three ways companies charge for the riders:
1. Build the rider into the product
When the rider is attached to a fixed indexed annuity, any explicit charge for the rider may cause the accumulated value to fall in years in which no indexed interest is credited. Rider charges normally continue until the accumulated value of the annuity is depleted or the rider is removed from the contract.
2. Deduct the rider charge monthly from the accumulated value of the annuity based on the income benefit base
3. Deduct the charge from the accumulated value, based on that value
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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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