The purpose of this article is to explain the difference between a fixed annuity's accumulated value and an income rider's income benefit base.
*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.
In just three and a half years, income riders have become one of the most popular benefits ever added to fixed annuities. Some carriers now report over 50 percent of people who purchase fixed annuities also elect to add this rider at the point of sale.
In 2003 and 2004, the first guaranteed lifetime withdrawal benefit (GLWB) riders were introduced on variable annuity products. At that time, the biggest advantage of these riders, compared to earlier income riders, was that the income benefit base did not have to be annuitized. The same is true today on a fixed annuity with an income rider. A GLWB guarantees a certain amount of lifetime income, without relinquishing control of the principal.
Adding a GLWB to a fixed annuity provides a third way to extract money from the annuity. The first way to extract money is to take normal withdrawals under the annuity contract, the second is to select annuitization, and the third is to use a GLWB to receive lifetime income without annuitizing the contract. A customer can add a GLWB rider to their annuity and never take income under the benefits of the rider. The rider simply provides additional options for their future retirement income needs.
Now, I'll address a fixed annuity's accumulated value and an income rider's income benefit base. Below is a T-chart that shows some of the differences between these two parts. The left side of the chart represents the accumulated value and the right side represents the income benefit base. Remember, the income benefit base is not cash and cannot exist without purchasing the underlying fixed annuity.
|Accumulated value||Income benefit base|
|This is the accumulated value of the underlying annuity.
||This special value serves as the basis for determining future lifetime withdrawal payments.|
|- Interest is credited to this value
||- A roll-up rate is credited to this value|
|- Basis for determining cash surrender value
||- Not the basis for determining cash surrender value|
|- Basis for any lump sum death benefit
||- Not the basis for any lump sum death benefit|
|- Basis for tracking interest taxed upon withdrawal
||- Not the basis for which indexed or fixed interest is credited|
|- Basis if an annuitization option is later elected
||- Not the cash element|
||- Cannot be withdrawn via lump-sum|
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. You are encouraged to seek independent legal and/or professional advice depending on your client's individual circumstances.
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