How important is guaranteed income? Ask any retiree or near-retiree, or read most any survey about concerns in retirement, and the most common fear is running out of money. Financial planners must consider what assets are available and what tools they have available to create and generate guaranteed, lifetime income.
Today, one tool often used in financial plans is an annuity with an income rider. An income rider guarantees an income payment for the life of the insured, and can even be set up to guarantee income payments for the insured’s spouse. Clients may even have the option for increasing income payments under some annuity contracts.
Here’s how it works: The average payout factor at age 70 is 5 percent. If your income base amount is $200,000, then the resulting payout is $10,000. In most cases, this would be the amount the insured would be guaranteed on an annual basis for their lifetime.
With an increasing income payment option, when there is any interest credited to the annuity, the insurance company increases the last annual payment amount by the interest earned, expressed as a percentage. Say your annual income payment was $10,000; however in the last contract year, you earned 4 percent in interest. The insurance company would then increase your lifetime annual income payment to $10,400. Choosing this option would help you keep pace with inflation, and potentially help you offset higher health care and other costs.
The Bottom Line: Guaranteed lifetime income is important to many of your clients. Show them options with annuities and income riders.
Today’s income riders available with fixed indexed annuities (FIAs) have evolved tremendously over the past several years, based upon what clients want, as well as what they need. Ten years ago, clients had to turn to variable annuities if they wanted a compelling income rider, but insurance companies have heard clients’ demands and have stepped up to deliver.
Clients want guarantees, flexibility, liquidity and control. Not every income rider or annuity has all four components, but you can customize an annuity plan based on your client’s personal priorities.
Let’s discuss guarantees, flexibility, liquidity and control. FIAs always have a guarantee on the downside, and now a rider may be added to guarantee that a client will never run out of income. These are not annuitized riders, they are guaranteed minimum withdraw benefits. Yes, if the contract value does go to zero, there is no cash value left, but the income continues until death of the client(s).
This approach also gives the client much more flexibility in how they receive the income and take the withdrawals. The withdrawals may be stopped and started, and in some cases, the deferral will go back into the contract or be held in a separate “bucket” for future use. This may be useful from a tax liability standpoint if a client is close to moving into a higher bracket.
Because the withdrawals are not annuitized and the client can turn them on or off, this also gives them control. It enables them to maintain contract value for a longer period of time if the value does start to decline and they do not wish to take all of the income available. The degree of control varies between carriers – some allow the income to start immediately while some require at least a year of waiting and also restrict the client as to when they can turn on the rider (anniversary date only or daily rollup).
All insurance companies reward clients who wait by offering rollups and/or age-based withdrawal factors. Find out when and how the client plans to use the rider, and we will find the best fit.
Most annuities have more-than-adequate liquidity provisions as well. With FIAs, it is generally 10 percent – this is either 10 percent of the premium or contract value. If it is the contract value, the client usually must wait a year. Some carriers even allow withdrawals without triggering the income rider.
The best recommendation I can make is to ask your client what they feel is most important. When do they want to start taking income? How much flexibility do they want with those withdrawals?
The Bottom Line: Know your clients and their hot buttons – drill down and find the best match for them. It may even make sense to split your client’s funds between two carriers, based on what they are trying to achieve.
© 2018 Ash Brokerage LLC.