Income riders have become one of the most popular benefits ever to be added to fixed deferred annuities. Members of the National Association for Fixed Annuities (NAFA) report that more than 50 percent of people who purchase fixed deferred annuities also choose to add an income rider. These income riders are also known as guaranteed lifetime withdrawal benefits (GLWB) or guaranteed lifetime income benefits (GLIB).
The first income riders were introduced on variable annuity products in 2003, and became available on fixed and fixed indexed annuity products a few years later. Income riders provide consumers with a guaranteed income for life (similar to what annuitization provides), but without having to give up access to remaining principal — a feature that caused many consumers to shy away from annuitization in the first place. By purchasing an income rider on a fixed rather than a variable annuity, the consumer benefits from the income rider while also being protected from investment risk.
An income rider on a fixed or fixed indexed annuity allows a retiree to build a secure retirement income. The issuing insurance carrier guarantees the payout provided by the income rider for the life of the annuity owner, as well as bearing all of the investment and longevity risk on the guaranteed payout — which means that the consumer is completely protected from these risks. Some annuity carriers even provide for the income to substantially increase in case the annuity owner is confined to a nursing home, further sheltering the annuity owner from risk. In addition, the annuity owner retains access to the annuity’s remaining value and continues to reap the benefits of interest credits to the annuity’s value.
How income riders work
Again, a guaranteed lifetime income or withdrawal benefit is typically optional on a fixed annuity, and is added to the annuity by a rider. Whereas the annuity has an accumulation value to determine the death benefit or annuitization, the rider also adds a second value: the income value.
The accumulation value works just as it always does on a fixed annuity. The annuity owner’s premium earns additional interest that is declared and guaranteed in advance or guaranteed through a calculation of the performance of an index (or indices), while at all times promising a minimum guaranteed interest. The unique benefit of a fixed indexed annuity (FIA) is that it has a built-in inflation hedge because additional interest is calculated based on a formula tied to the designated index (e.g., S&P 500).
With income riders, the income value is completely separate from the accumulation value. It typically grows at a fixed rate of interest, and when the retiree elects to start taking lifetime withdrawals, a payout factor is applied to the income value to determine the guaranteed annual withdrawal. If the accumulation value is higher than the income value when the policyholder decides to withdraw the income, then the accumulation value is used in the payout calculation instead. Once the amount of guaranteed withdrawal is calculated, the retiree may withdraw that amount from the annuity every year for life.
While taking these withdrawals, the retiree is provided with two very valuable guarantees.
- Although the annual withdrawals are deducted from the accumulation value, the additional interest (declared or indexed) continues to be credited to the accumulation value, and the retiree retains access to the remaining accumulation value at all times.
- Even if the annual withdrawals ultimately deplete the accumulation value, the issuing carrier must continue making the annual payments as long as the retiree lives.
In this monthly column, the National Association for Fixed Annuities (NAFA) will provide essential information about fixed annuity product features, regulation, tax issues, and industry news. We invite you, the reader, to send us any questions that you often hear — or that you may have yourself. Submit your questions to [email protected] with the subject line “Fixed Annuity FAQ” to have your problems answered here.
The National Association for Fixed Annuities (NAFA) is a national trade association exclusively dedicated to promoting the awareness and understanding of fixed annuities — including income, declared rate, market value adjusted, and indexed. You can follow NAFA on Twitter at www.twitter.com/nafausa.