Super-size me: outrageous benefit riders

By Larry Qvistgaard


Give me the X living benefit and throw in the Y death benefit for good measure. Mix it together with the Z provisions for X and Y … what do you get? Who really knows.

We’ve all been there. An annuity with all the bells and whistles which addresses all of your client’s needs, wants and desires. While price may or may not be an issue, it is often glossed over because “this is the best thing available.”

Flash forward two, three, five or 10 years. Did they really need all of those benefits? At what cost?

Many financial advisors are so focused on the shiny object — the highest roll-up rate on income benefit or death benefit — that they might be missing the true need or concern of the client. What’s the old saying,”if it sounds too good to be true, it most likely is too good to be true.”

My question for those outrageous benefit riders would be what is my client giving up in order to get such a great benefit? Safety and security from a financially sound company? Locking up their money with no chance of getting out? Great income growth but little or no chance for my account value to ever equal or exceed the benefit value? Great income, but little or no possibility of giving anything to their heirs? High cost?

Here’s what I can tell you. Any enhanced benefit, be it living or death, comes at a cost. That cost eats away at potential earnings. Everyone realizes this; it’s the price you pay for a safety net, or as a "just in case."

But what happens when the difference between the cash value and the benefit value increases? In virtually every annuity (fixed and variable) the fees also increase. You ask, "How, if the fee for the living benefit rider is only .50 percent, as stated in the contract?"

Look deeper — is the fee based upon the benefit value or cash value? Is it based on the benefit value, but is charged against the cash value? This isn’t a big deal if the cash value and benefit value are the same. But when the benefit value outpaces the cash value all bets are off. What happens when the market is negative or flat? What happens to the fee?

You better know the answer. Let me give you a simple example. Great Product A has the Awesome Living Benefit Rider and Superb Death Benefit Rider. Combined, the added cost for the riders is 1.50 percent. Let’s assume that the current cash value is $100,000 and the living/death benefit value is $200,000. The rider cost is still 1.50 percent, but it’s based on the $200,000 or a total fee of $3,000 (3.0 percent of the cash value).

Oh wait, it can get worse. I’ve seen some of these “great products” that actually lock in the fee once income commences on the original benefit base. That’s right. If you offered your client one of these products and your client began taking their guaranteed income for life, the fee of $3,000 in our example is locked in forever.

As the annuity account value decreases due to withdrawals and little or no market gains, the percentage that the $3,000 represents becomes staggering.

How did this happen? Focus and attention were on the shiny object (the “great” benefits) without attention to the cost.

Ok, so oftentimes, your client does want all of the benefits. What should you do? Simply stated; think before you order. What is the client’s ultimate goal? Which benefit(s) provide your client with the best protection to meet their goals? Which product(s) offer the best cost/benefit relationship?

One way to test this would be to run an illustration assuming 0 percent return. See what happens when the true cost of that benefit compounds three, five, and 10+ years. Bottom line, take your eyes off of the shiny object and compare product A versus product B versus product C. Take all factors into account and look for the most complete package.

Just like in “Super-Size Me,” the great big meal came at a price (obesity). So, too, does fattening up the benefits. Help your clients by taking your eyes off the shiny object and guiding them down the path of retirement success.

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