Riders are creating an annuity sales storm
The Annuity Man
Any time I have the chance to reference Jim Morrison and The Doors with an article title, I’m going to take advantage of that opportunity. If you are too young to remember the song “Riders on the storm,” then you are probably not old enough for an annuity transfer of risk contract to make sense anyway. How’s that for a client suitability filter!
Riders attached to deferred annuities are all the rage with most annuity sales today, so it's important to know the facts before you mistakenly buy the pitched dream...because you will own the contractual reality.
What is a Rider on an annuity?
A rider is a benefit that you choose to attach to a policy at the time of application. Typically, that rider comes with an annual fee for the life of the policy, with that fee coming out of the accumulation value part of the contract.
Most riders sold today are attached to either Fixed Index Annuities (FIAs) or Variable Annuities (VAs). In my opinion, if you attach a rider to a policy…you should make the decision to buy that policy based on the contractual guarantee the specific rider provides.
This type of rider provides a lifetime income benefit that you choose to turn on at a future date. Income Rider’s typically have a high % annual growth rate during the deferral time period. It’s not yield and you can’t peel off that interest or cash it in, but you can use that dollar amount to calculate your future income stream.
Remember that an annuity lifetime income stream is primarily based on your life expectancy at the time the payments start. Interest rates play a secondary role.
Death Benefit Rider
Life insurance is still the best legacy product on the planet. It’s the best ROI (Return on Investment) that you will never see….because you are dead! If you can’t qualify or pass the underwriting for life insurance, then a death benefit rider attached to an annuity might be your only legacy solution.
These death benefit riders are “guaranteed issue” and require no underwriting at all. The attached benefit grows by a certain percentage while you are alive, and can be paid out lump sum or over a 5 year time period depending on the policy. Unlike life insurance proceeds that pass to the beneficiaries tax-free, annuity death benefit rider proceeds are taxable.
Confinement Care Rider
If you go to the “bad chicken dinner seminar,” the FIA (Fixed Index Annuity) salesman will probably pitch an “income doubler” for confinement care. Even though some agents call it Long Term Care (LTC), it is not that type of health care coverage at all.
Confinement Care Riders are “guaranteed issue” and the qualification details for the enhanced payout varies from carrier to carrier. In essence, the annuity company is giving your money back quicker when you get sicker. In a perfect world, these types of riders would be used as secondary coverage. But if you can’t qualify for traditional LTC, then these confinement care riders could be your only choice to address this type of needed risk transfer.
Confinement Care type riders are typically built into an Income Rider so make sure you fully understand the contractual details of this attached benefit before signing the application.
No one rides for free
Annuity companies have the big buildings for a reason. If you attach an rider to a policy, it typically comes with an annual fee….as long as you live. With most policies, if you have a rider that is growing by a specific percentage every year during the deferral time period….then the annual fee is also growing by that amount as well and locks in permanently when you access those rider benefits.
For example, let’s say you have an Income Rider growing at 7.2% per year during the deferral time period. If the annual fee for that rider is 1% at the start of the policy and you turn on the income stream 10 years after the policy is issued…the annual fee would have doubled to 2% per year. When the income stream starts in year 10, the 2% annual fee locks in for life and is deducted annually out of the accumulation value part of the policy.
Decide at the time of application
Not all deferred annuities like FIAs (Fixed Index Annuities) or VAs (Variable Annuities) offer these riders as attachments. If a specific rider is offered, you have to choose to add it to the policy at the time of application.
Riders can’t be added after the policy is issued and is past the free look time period.
All Riders are not the same
Regardless of the type of rider, they are all commodity products. Riders are contractual guarantees, so you need to shop all carriers for the best contractual number for your specific situation. Don’t hesitate to ask your agent or advisor for a specimen policy that fully explains the rider so you can make an informed decision, and always make your annuity buying decision on your terms and on your time frame.