Assumptions Vs. Reality: Considering Income Riders

By Cary Carney

When it comes to comparing guaranteed lifetime income benefit riders on fixed indexed annuities, how do you do it?

There are so many income riders in the market today. How do you choose the best one for your client? Ultimately, we want to find the option that provides the highest amount of income for our client for when they need it — although there are other crucial aspects to consider. Three additional determinants should include level of complexity, cost and timing.

Level of complexity is an important factor when comparing FIA income riders. An average consumer may not understand what a step-up is. Try explaining phantom benefits to your parents or grandparents. Income riders may include intricacies such as payout factors, guaranteed roll-ups for income, step-up provisions and expenses. Is the cost of the income rider applied to accumulation value or income? Are they using accumulation versus a roll-up to factor the income payout? All of these are vital factors and questions to consider when looking for “the best” income product for your client.

There are competitive and simple FIA income riders on the market that exclude many of the confusing factors by design. Often in life when we discover something that is simple yet truly awesome, we question the reality of it because it sounds too good to be true. When you discover FIA income rider options like this, be sure to take a closer look, as you may have found a real treasure.

Cost is always an important factor. If you want everything locked down and guaranteed for when the client turns the income on, the client will pay significantly more in rider charges over the course of the product life cycle. Instead, they could consider a nonguaranteed roll-up rider that uses the value from their accumulation to calculate their guaranteed income stream. If the payout factors that are applied to most income riders are strong, a small increase in accumulation value —say 2% to 2.5% per year — can make up for some of the highest roll-ups out there and save the client significant expense charges for the rider.

When comparing income benefits, many of us may follow a simple rule of thumb by illustrating an issue age of 65, with income starting in 10 years. I have been guilty of this myself. However, this may unintentionally backfire on us.

We need to focus on when clients actually exercise income riders, along with the cost to the consumer of these riders, and weigh that information against the actual guaranteed payout for the client. To get from the starting point to the finish line, we should start by looking at what actual consumer behavior statistics tell us regarding the timing of income commencement.

After analyzing information from 36 participating annuity companies that spans beyond the past two years, the Wink’s Sales & Market Report, Q1 2020, shows us that consumer behavior is much different from how we typically compare the competitiveness of income riders.

With express permission from Sheryl Moore at Wink, we share the following data from the Annuity GLWB Elections segment of their cited report that the average age of a consumer who purchases an FIA including a lifetime income rider is roughly 62 and income commencement is exercised in 3.2 years. Sixty-five percent of consumers start taking income within the first four years. Less than 4% turn on income in the 10th year or later.

According to these consumer behavior statistics, we can clearly see that our old rule-of-thumb assumptions (using age 65 with income starting in 10 years) are quite off base. What we should look at when running general competitive comparisons is how the income payouts look when exercising through Year Four. However, when following this approach, we may still find ourselves missing out on plans that have exceptional income opportunities.

By attempting to standardize all income riders and pick a date in time to turn on the rider, we may not be finding the best options for the client’s true needs. Throw the old rule of thumb out the window. Be creative with your planning to find the best alternative for your client.

For example, there are products designed to be extremely simple and cost effective to generate a guaranteed income stream for your client, but it may not be as easy as lining them up against every other rider and choosing an income start date.

Some income riders may have a three-year waiting period. Look closer at those products, as they may allow up to 10% surrender-free withdrawals each year. Use the withdrawal benefit to provide income for the first three years and then, in the fourth year, turn on the income rider for the guaranteed payout. If the payout factors are superior to others, you can generate income immediately for the client that could exceed income provided by single premium immediate annuities or other products with guaranteed income and may even come at a lower cost to the client. Compound that with the client’s ability to stay flexible and not give up control of their assets; it could be a major win-win.