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July 03, 2017 at 09:36 AM
Many conversations about fixed annuities now lead to talk about adding income riders.
Your clients may even think of adding an income rider to an annuity as the best of both worlds. They may look forward to getting income from the income rider, along with accumulation of assets from the underlying indexed annuity, or traditional fixed annuity.
(Related: GLWBs and LIBRs: Which Annuity Rider Fits Your Client?)
But this seemingly smart recommendation has a downside: While income riders can help clients meet future income needs, the riders also can drag down clients’ potential for asset accumulation.
For many clients, the thought of having a secure, stable income guaranteed for the rest of their lives can and should be a huge draw. The fact, however, is that all annuities have the ability to offer a guaranteed lifetime income stream, or another type of payout designed to match a client’s specific income needs. That’s because income options are part of every annuity contract. Those options don’t cost anything.
The addition of an income rider to a base annuity contract, while adding some flexibility to a client’s income option, isn’t free. It comes at a cost.
Your clients may be thinking that, with an income rider, “I’ll get income, plus accumulation.” In many cases, what they’ll really get is an additional income option, with mediocre accumulation. The rider fee may eat up a significant portion of the interest crediting. Paying a fee for more flexibility in the income option feature that already comes with an annuity contract will drag down a client’s potential for overall yield and accumulation.
To help align clients’ goals with the right annuity purchase, and avoid this drag on their principal, consider the two philosophies behind selecting an annuity: accumulation and distribution.
