Are combo-riders for lifetime income and death benefits really worth the cost?

By Luke Britt

The Insurance Group

In the past few years a trend has emerged of lifetime income riders including a death benefit option if withdrawals are never elected. Typically, the death benefit option is paid over a period of time, usually 5-10 years.

This has added value to the indexed annuity proposition allowing the producer to provide solutions for asset protection, longevity and asset transfer in one product. Who wouldn't want to have all of these benefits?

One concern about this attractive feature is the cost of the benefit riders currently offered. Of the products that our firm works with we have seen fees for these combo riders range from 0.85 percent to 1.15 percent. These fees are usually calculated using the benefit base.

With interest rates being historically low there is a chance that these fees can deplete a portion of principal if gains do not cover the fees. So are the benefits worth the cost?

Let's look at an example: a hypothetical fixed indexed annuity product features a 7 percent rollup for lifetime income and death up to 200 percent of the initial premium and any applicable bonus (5 percent in this case). The fee is 1 percent. Based on $100,000 of premium, the average annual fee over the course of 10 years would be $1,552. The 5-year death benefit would be $206,551.

To compare, a no-lapse UL policy of $200,000 for a standard 65-year-old male non-smoker would be about 3.5 times the average annual rider fees. That would mean the rider fee would need to be over 3.5 percent in order for the rider fees to catch up to the cost of the no-lapse UL.

Now, there are obvious differences in tax treatment and coverage before 10 years passes, not to mention the forced 5-year payout, but you can see where I am going with this.

Speaking of taxes, let's use an example. Let's say the initial premium is from an IRA rollover and is taxed at the beneficiaries' hypothetical future tax rate of 30 percent, making the net benefit $144,586. If a no-lapse UL is purchased for this same amount of coverage for our proposed insured the cost is $3,500 annually or more, depending on the carrier.

All this rhetoric is to point out that death benefit and lifetime income combo-riders are valuable assets to the financial professional. They may not always be the best solution for asset-transfer, but do a pretty darn good job of it while also planning for the need of additional future income if the need arises. The key lies in if the agent is careful in disclosing the fees to their clients.

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