GUARANTEED INCOME
An income rider provides lifetime income while allowing you to maintain control and access to your principal.
The only way you used to be able to secure lifetime income with an annuity was to “annuitize,” or pay a lump sum to an insurance company and then turn it into a series of payments. One major downside of this was losing access to your principal. Insurance companies then created a rider option for annuities that would allow you to receive lifetime income without annuitizing. This rider for variable and fixed annuities made annuities a more popular option for retirees. Retirees can now own a retirement asset while growing their principal and guaranteeing lifetime income.
We can help you achieve guaranteed income and safety in retirement.
SPEAK TO AN ANNUITY EXPERT TODAY
Turning a 401(k) Lump Sum Into A Secure, Lasting IRA
Transitioning from saving to figuring out how to turn savings into retirement income can be difficult. Annuities are one potential solution, which is why many retirees roll over 401(k) funds into annuity-funded IRAs. This helps protect the principal against market risk and longevity risk. But, what about returns when interest rates are low? Annuities are a combination of insurance AND investment, and income isn’t only based on current interest rates.
Look for “GLWB”
GLWB stands for Guaranteed Lifetime Withdrawal Benefit. The GLWB is a form of insurance and is the least complex and most straightforward type of rider. It ensures that you will have a certain amount of income each month for the rest of your life, despite market ups and downs. The rider allows you to stay in control of your principal and preserve a death benefit for a long period of time. Your income can grow and can help cover both you and your spouse by deferring an annuity income rider into the future. This way, an annuity an act like a pension by providing lifetime income to your future.
The Annuity Income Rider, Also Known As The Living Benefit Rider
The Annuity Income Rider, also known as the Living Benefit Rider, offers contract holders a predefined payout for the rest of their lives, regardless of what happens with the market or how long the contract holder lives. A rider can be added to a variable or a fixed index annuity, but not to an immediate or fixed annuity.
Some fixed index annuity riders pay more income than variable annuities, and demand for the former is increasing. Riders on variable annuities are typically more expensive and may pay less than riders on fixed index annuities. Another downside is that variable annuities expose principal to market risk, unlike fixed index annuities.
Riders are optional and are usually paid for by the automatic shifting of funds from principal into the rider account every year. The charge is typically about 1% annually, but some fixed index annuities have zero annual fees for the rider. Some variable annuities have income rider fees as high as 1.5%. The rider charge is the only fee deduction with a fixed index annuity, so if you don’t want a rider, there are no fee deductions.
What Type of Rider Is Right For You?
There may seem to be too much information on riders to keep track of when making a decision, but sorting out riders is often done by the insurance company. There are three main types of riders:
- Guaranteed Lifetime Withdrawal Benefit (GLWB)
- Guaranteed Minimum Income Benefit (GMIB)
- Guaranteed Minimum Withdrawal Benefit (GMWB)
Most riders today are GLWB’s (Guaranteed Lifetime Withdrawal Benefits). They are the simplest and most straightforward, and can typically offer the potential advantages of other types of annuities. GMWB annuities are often not the ideal choice for several reasons.
Most living benefit riders are designed to provide lifetime income at a set rate, even if the principal falls to zero. For the most part, fixed index annuity income riders use GLWBs, which provide income for life. In contrast, some variable annuities have riders that may not last your whole life, known as GMWB. In general, a good annuity investor will look for an annuity with the best income at the lowest cost that doesn’t require the contract holder to annuitize, but still guarantees income for life.
GMIB: Guaranteed Minimum Income Benefit
The guaranteed minimum income benefit (GMIB) rider requires the investor to annuitize before receiving the benefit and may also include time and age limitations. It provides lifetime income in exchange for giving up your principal, regardless of investment performance. The payment amount is determined by either the contract value or the investment amount plus an interest rate between 1% and 4%, whichever is greater. This interest rate is either simple or compounded.
GMWB: Guaranteed Minimum Withdrawal Benefit
The Guaranteed Minimum Withdrawal Benefit rider has limitations that many other riders don’t. This rider allows the contract holder to withdraw a certain percentage of the investment amount every year, regardless of market performance, until the entire investment amount is depleted. The amount withdrawn in a GMWB is typically between 5% and 7%. A step-up feature guarantees higher withdrawal amounts when investments do well over a certain period of time, such as annually or every five years.
GLWB: Guaranteed Lifetime Withdrawal Benefit
The guaranteed lifetime withdrawal benefit (GLWB) rider allows the contract holder to withdraw a certain percentage of the investment amount each year of his or her life. The amount usually ranges between 3% and 5%, depending on his or her age, and whether the guaranteed payment covers one or two people.
Long-Term Care Protection
Long-term care protection riders can also be available. This allowed contract holders to withdraw funds without penalties if they have a catastrophic illness or need to be in a care facility. The distribution of annuity assets with long-term care riders is tax-free, as long as certain criteria are met.
Summary
Living benefit riders offer a way to fortify the fixed income portion of your plan for retirement, as well as the following advantages:
- An income rider provides lifetime income while allowing you to maintain control and access to your principal.
- You are not required to “annuitize” your principal with certain income riders. It is a simple guaranteed lifetime withdrawal benefit.
- Your income won’t go down, despite the fact that your principal might grow or shrink over time depending on markets and interest rates.
- It’s easier to create a retirement plan when your retirement income is defined and guaranteed.
The benefit is typically funded by a deduction from the principal every year, ranging from 0.5% to 1.2%. Because all owners with the benefit are paying into a pool of audited capital, the benefit has a source of funding similar to the way a pension plan is funded. Income riders for fixed index or variable annuities are optional. Some fixed index annuities come with built-in income insurance, with no annual deduction from the principal.