Hybrid Annuity Income Riders
The hybrid annuity income riders are optional attachments to many contracts. This is the point where an index annuity becomes a ‘hybrid annuity’. When lifetime income riders are attached to the underlying fixed index annuity, the annuity takes on new benefits, and a little more complexity.
With an income rider, a calculation starts at the beginning of a contract, and accumulates for each year the annuity is invested and accruing. This ‘Income Account Value’ and the ‘Payout Rate’ is how the insurance company calculates your lifetime income when you turn on the income option.
The income account may be phrased as an ‘income account’, ‘benefits base’, or other terms. Acronyms are usually IAV and BB. We’ll use ‘income account’ through this report.
Account Value Vs Income Account Value
A key element to clarify in our discussion of hybrid annuities is the difference between your actual account value, as opposed to your income account value.
These are two very different things that are frequently confused by investors and advisors alike.
If anyone is telling you that a hybrid annuity they are selling is ‘guaranteed to go up by 7% per year’ they are flat out lying to you. Let this tripwire be your gauge of the integrity of any sales person you encounter- if they mess this one up, what else do they not understand?
If you want, go back to the Benefits Of Hybrid Annuities page where I gave a marketing focused description of a Hybrid Annuity. Reading carefully, it may seem like the annuity account grows at 7% per year, but that is not what it actually says. It’s the Income Account that ‘Rolls Up’ at 7% per year.
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The account value is YOUR money- real dollars that may appreciate (or lose value, in the case of a Variable Annuity). That’s the core of the annuity as an investment product.
An Income Account Value is NOT real dollars. It’s just a number that the insurance company uses to calculate future payout rates from. It’s the bridge between the investment, and the income insurance.
Income Rider Fees
The income Rider on a typical Index Annuity incurs an annual fee of ranging among carriers between .75% and 1% of the account value per year. Compare this to the fees in Variable Annuities, averaging 3% to 5%, and this lifetime income option is a good value.
Index annuities marketed as lifetime income products with this rider may have lower caps and participation rates, however. Be sure to know your goals going in- if you are looking for safe appreciation only, without the lifetime income, it may be more lucrative to buy an index annuity with higher caps and participation that does not offer a lifetime income rider.
Rollup Rate: How An Income Account Value Works
Income accounts generally start with the same value as your premium investment. If you invest $100,000 at the start, your Income Account will also start with 100,000. Notice, there is no “$” in front of this number. Companies may also use a Bonus that will add to your Income Account at the contract start. More on the bonus in just a moment.
With a $100,000 investment, just the Income Account calculation rolling up at 8% per year would look like this:
Some companies additionally offer a ‘Bonus’ on new accounts. It varies from company to company, but usually, the bonus is credited to your Income Account Value. For example, a $100,000 investment in a contract with a 10% bonus would have an Income account value of 110,000 on day one. This 110,000 would grow by the rollup rate each year. Using the table above with a 10% bonus, it would look like this:
The payout rate is an aged based percentage of the Income Account Value that determines your lifetime income amount. In most contracts, once you start taking income, the rollup of the Income Account stops.
Some companies allow you to start and stop income a few times, and reinstitute the rollup when you are not taking income, but this is not available in all contracts.
In the chart below, I show the rollup rate from above, an aged based Payout Rate that gets better the older you get, and the corresponding annual income amount. You could commence a lifetime income of the amount in the right hand column in any year, but once you start, the rollup stops.
Your payout rate will vary depending on the carrier and your current age. Below is just for illustration purposes.
Hybrid Annuity Complete Table
Now, to tie it all together we have the following table. It shows the rates described above and how they all fit together.
In the table above the colored columns indicate the different riders. This is where all the confusion starts but I’m going to make it as simple as possible… you will only get the value of ONE of these columns.
Notice that the Income Account Value column is not highlighted and has no dollar sign. You WILL NOT receive that in a lump sum or in any other way because it is not your money. It is simply an amount used by the insurance company to calculate the lifetime income amount shown two columns to the right.
If what you just read seems contrary to what someone else is telling you, then stop talking to that person because they are lying to you.
Here are the basics of what you can expect:
- If you decide to cancel the contract, you’ll get the account value less any surrender charges.
- If you die, your heirs will receive the death benefit.
- If you take the lifetime income benefit, you will receive the scheduled payment annually for life.
- If you qualify for long-term care, you will receive the indicated boost in lifetime income.
Of course, we’re ready to assist you picking the best contract for your needs. Simply give us a call.
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