We would love to hear from you. Click on the ‘Contact Us’ link to the right and choose your favorite way to reach-out!


media/speaking contact

Jamie Johnson

business contact

Victoria Peterson

Contact Us


Close [x]

Blog + Articles


  • Industry Articles (13,736)
  • Industry Conferences (2)
  • Industry Job Openings (3)
  • Negative Media (128)
  • Positive Media (73)
  • Sheryl's Articles (524)
  • Sheryl's Blogs (150)
  • Wink's Articles (203)
  • Wink's Blogs (177)
  • Wink's Press Releases (80)
  • Blog Archives

  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • November 2010
  • October 2010
  • September 2010
  • August 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010
  • March 2010
  • February 2010
  • January 2010
  • December 2009
  • November 2009
  • October 2009
  • August 2009
  • June 2009
  • May 2009
  • April 2009
  • March 2009
  • November 2008
  • May 2008
  • February 2008
  • Income riders: Don’t be blinded by the shiny object

    July 9, 2014 by Jason Kestler

    As a poor college student, I used to do a lot of diving in the Florida Keys. After seeing a large shark one day, I asked one of the experienced divers if I should be worried. “No,” he said. “Sharks will usually leave you alone unless you (or a fish you just speared) is bleeding. But watch out for barracudas; they are unpredictable and will go after shiny objects like that chrome buckle on your bathing suit.” As I looked down at my buckle, my imagination took off. All I could think about was a five-foot long predator with really big teeth taking a liking to my belt buckle — and whatever else might be nearby.

    We are all drawn to shiny objects in one way or another. They take many forms: a new car, a big diamond, that killer pair of shoes. Usually, our rational mind takes over and says something like, “That’s a really beautiful Ferrari, but my good old Ford gets me from point A to point B at a fraction of the cost and with significantly better gas mileage.” In it’s own way, your mind is saying, “What good is a car that can go 200 miles per hour if it runs out of gas halfway between A and B?” The goal is not the sparkle — the goal is to get to point B safely and efficiently.

    In today’s annuity market, income riders are riddled with shiny objects. But, before exploring them in detail, lets do a little review.

    An income rider attached to an annuity contract can provide a significant benefit to the owner. It ensures that once his strategy changes from accumulation to distribution, he can be confident that his income stream will last as long as he does — even if his “cash” account is depleted.

    When an annuity is issued with an income rider, the carrier will essentially keep two sets of books on the contract. The cash account is real money. This reflects the premium plus any bonus, if applicable, plus credited interest minus any rider or strategy fees. The cash account is the account you can take withdrawals from. It is also the death benefit and surrender value after any surrender charges are applied.

    The second set of books — often referred to as the income base — is phantom money. It doesn’t exist. It is only a calculation. If the income rider has a 5 percent compound step-up, the income base would be the initial premium compounded at 5 percent. At any point in time, the cash and the income base will be two different numbers. When the client is ready to begin taking lifetime withdrawals from his account, the company will compare the two account values and apply the greater of the two to the specified payout factor — this is the lifetime income amount. For example, if the initial premium is $100,000 and at some point in the future the cash account has grown to $125,000 and the income base has grown to $150,000, the income base (the larger of the two) would be applied to the payout factor. If the payout factor is 5 percent, the client would receive $7,500/year ($150,000 x 5 percent) for life.

    Once lifetime income is triggered, the income base vanishes and the cash account continues to operate as usual; but in addition to interest credits and fee deductions, the $7,500 is also deducted annually. At some point in the future, the cash account will always go to $0, but until then, the cash account is available for emergencies and as a death benefit.; Once the cash account goes to $0, the insurance company steps in and continues the $7,500 for the life of the client.

    It is important to not lose sight of the fact that: A) A strong accumulation “engine” will maintain cash (read options and flexibility) much longer than a poorly performing “engine,” and B) The client always spends his money first. Therefore, higher income just means he is spending his money down faster and the insurance company steps in sooner. Once the client is spending insurance company money, they essentially own a SPIA.There are three primary parts to an income rider:

    • The fee or cost of the rider itself;
    • The accumulation benefit – often referred to as the step-up;
    • And the payout factor.

    While there are a dizzying number of additional factors to consider when analyzing these riders, for the sake of this discussion, we will focus only on these three.

    Rider fees are essentially the cost to “insure” the income stream. Income riders on index annuities have fees ranging from 60 basis points (bps) to 110 bps. Income rider fees on variable annuities typically begin at 100 bps due to the fact that they have to price for the potential of a market loss in the cash account.

    The accumulation benefit or step-up is the primary “shiny object” in an income rider. If you had a choice between a 10 percent step-up or a 7.5 percent step-up, which would be better? Most cousumers (and lazy agents) would choose the 10 percent (bigger “shiny object”). However, if the 10 percent was a simple interest and the 7.5 percent was compound interest, the real answer is, “It depends.”

    All other things being equal (which they rarely are), if the client anticipated a short deferral period, the 10 percent simple would be the better choice. However, if they anticipated a longer hold, the 7.5 percent compound would be a better choice.

    The payout factor is the least visible of the income rider variables — often buried somewhere in the policy fine print. Since fees and step-ups are fairly visible rider features, often payout factors are compromised at the expense of a large step-up.

    Let’s take a real life example. David is 56 years old and plans to retire at age 68. His goal is to receive a minimum of $40,000 a year in additional retirement income. A recent report by a large national carrier posted the following results:

    Lifetime Income Benefit Rider Roll-up Amount Lifetime Withdrawal Percentage at Age 68
    Rider A 5% Compound x 10 Years 5.00%
    Rider B 6% Simple x 10 Years 5.50%
    Rider C 5% Compound x 10 Years 5.30%
    Rider D 7% Simple for 10 years 4.75%
    Rider E 2% Compound x 10 Years 8.15%

    David wants to know how much he needs to set aside today to guarantee his income goal.

    Lifetime Income Benefit Rider Initial Investment Amount Needed Income Base Required to Achieve Income Payout Factor at 12 Years Desired Annual Income
    Rider A $491,131 $800,000 5.00% $40,000
    Rider B $454,545 $727,273 5.50% $40,000
    Rider C $463,331 $754,717 5.30% $40,000
    Rider D $495,356 $842,105 4.75% $40,000
    Rider E $402,625 $490,798 8.15% $40,000

    It’s interesting to note that the income rider with the lowest step-up has the best solution and would save David over $90,000 compared to the policy with the 7 percent (simple) step-up. Right about now, I’m remembering the barracuda story. The “shiny object” would have cost him $90,000!

    Here are seven things to consider for anyone thinking about using an annuity with an income rider.

    1. Pay attention to the details and beware of “shiny objects.”

    2. There is no such thing as a perfect product for every situation.

    3. An annuity with a high income number at the expense of underlying performance may be little more than a tax deferred SPIA.

    4. In many index annuities, the guaranteed minimum is also the maximum income. Consider a policy with a 6 percent step-up on the income rider and a cash account with a 4 percent cap. When does 4 percent beat 7 percent? Never!

    5. Not every client needs an income rider. If you are using an index annuity as the fixed asset in an allocation model, why add the additional layer of fees?

    6. Consider offering policies with a cost of living adjustment (COLA). There are a couple on the market today with a COLA based on the urban consumer price index (CPI-U). If you think we may be entering an inflationary period (as many economists do), having this option during payout could be huge.

    7. All things being equal, an income rider on an index annuity is more efficient than one attached to a variable annuity. On the other hand, if a client is looking for growth and has time on his side, a variable annuity without an income rider may be the best choice.

    Originally Posted at ProducersWeb on July 8, 2014 by Jason Kestler.

    Categories: Industry Articles