Annuitization or income riders? Help clients make the right decision

Steady, predictable income is often what drives financial decision making for some retirees - but not all. Many prioritize flexibility and the freedom to adapt their strategy as life unfolds.

This wide range of needs make the decision on whether to recommend annuitization or income rider options a less than straightforward decision for agents.

Maintaining a predictable monthly income while preserving liquidity and adaptability to changing conditions can sometimes feel like a circus act. Instead of steering clients toward a particular product, we must present the pros and cons based on their needs.

When clients see the whole picture, they're best equipped to choose what is right for them. And when they see that your knowledge (instead of handing them an inch-thick illustration packet) enables them to take ownership of their retirement plan, their decision is more likely to stick.

Start with the client’s goals

This should go without saying, but too many times financial professionals dive first into product features before understanding what the client wants.

Annuitization appeals to those who prioritize simplicity and predictability and who aren’t concerned with liquidity. Income riders, on the other hand, offer more control, flexibility and optionality down the road. However, they run the risk of lower income and higher fees.

The pros and cons of annuitization vs. income riders

Here’s how to lay out the trade-offs:

Annuitization

Pros:

• There is one decision, with lifetime income and no ongoing management.
• Guaranteed payments based on contract terms.
• Potential for higher payouts. In specific rate environments, full annuitization can generate higher income than an income rider can.

Cons:

• Once it’s done, it’s done. There is no access to the principal and no adjustments later.
• Legacy limitations. Beneficiaries receive the remaining value if limited income guarantees or refund options are elected, possibly at an additional cost.
• Interest rate opportunity cost. Annuitization rates are tied to current rates, which means locking in today’s rates could leave clients regretting it later if rates rise.

Income rider

Pros:

• Clients retain access to the contract value and can cancel the rider if needed.
• Legacy benefits. Beneficiaries receive any remaining account value after the annuitant's death.
• If their needs change, such as unexpected medical expenses or shifting retirement plans, they have additional options for responding financially.

Cons:

• Lower income. Due to the optionality, riders typically pay less than the full annuitization amount.
• These can range from 0.75% to 1% annually, which can reduce overall contract growth.
• Riders can be confusing, especially for those who are not financially savvy.

Changes on the horizon? Many external factors must be considered

In today’s interest rate environment, annuities remain an attractive option for conservative clients seeking fixed income. However, rates are impacted by many factors. We must continue to monitor inflation and assess the extent to which tariffs exacerbate price increases.

For clients who are uncertain about the future or sensitive to interest rate fluctuations, locking in today’s rates may be more appealing than deferring their options until later.

Regulatory changes are also reshaping the landscape. New state-level rules regarding annuity sales and suitability require us to document these discussions carefully. Providing a clear and well-documented rationale for any recommendation is crucial, whether suggesting annuitization or income riders.

No one wants a client returning later, claiming they didn’t fully understand the implications of an irrevocable choice.

Keeping the conversation client-centric

Discussions with clients should focus on their comfort level regarding control, access and certainty. Here is how I often frame the options:

“If you value the guarantees of knowing precisely what’s coming in every month and aren’t concerned about leaving money behind or needing flexibility, either an income rider or annuitization could make sense, depending on your needs. But if you want access to your assets or to leave a legacy, an income rider may be the better fit.”

Also, specific scenarios require a closer look.

1. A client focused on maximizing income, regardless of flexibility. Lean toward annuitization, but only if they truly understand the long-term commitment.
2. A client seeking access and control. Riders can provide guaranteed or escalating income based on the product, while still offering additional customer control.

It bears repeating: Don't promote one over the other. Help them understand what works best for them.

Annuitization vs. income riders: Focus on needs and be transparent

Some clients will benefit from the simplicity and higher income of annuitization, while others will prioritize flexibility and legacy planning with income riders.

Guide clients through the trade-offs, provide precise numbers, and offer complete transparency around fees and implications. In today's market - with shifting rates, evolving regulations and typically well-informed clients - transparency is more important than ever.

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Andrew Sheen is the senior vice president of distribution growth and wealth transformation at AmeriLife. Contact him at [email protected].