As you probably know, one of the top fears of people entering retirement is that they’ll run out of money.1 One way to help cover this “longevity risk” is with a guaranteed lifetime income annuity rider. As with all annuities, the guarantees are backed by the financial strength and claims-paying ability of the issuing insurer. But income riders also offer suitable clients the ability to offset some of the unexpected costs associated with health care, another top concern, particularly in the later years of retirement.
For an annual fee – generally averaging about 1.0%, depending on the carrier – as an alternative to annuitization, income riders provide a lifetime income stream that’s available at the time of an annuity or life product’s purchase. Depending on the carrier, income riders offer a few options for clients to accumulate interest and potentially increase their income base during the deferral period before the income distribution begins.
These options often include a compounding guaranteed rate, or a lower interest rate with additional interest credits based off of the annuity’s accumulated value. Once clients begin taking income, insurers calculate their guaranteed minimum income using age-based tables known as guaranteed withdrawal percentages, which is also known as the “roll-up rate”.
So it’s important to be clear with clients that there’s a difference between the roll-up rate and income base options insurers provide during the deferral period, and the pay-out rate that’s used to calculate the guaranteed minimum income clients receive once they start taking income. It’s also important that clients understand that the income base, or benefit base, is different than the annuity’s accumulated value and that the benefit base is never available for cash withdrawals because it does not have any cash value, but instead is solely used as part of the calculation to determine the income payments.
Recently, several companies introduced “doublers” on income riders. The aim is to help close the insurance gap for a limited period of time to pay for some of the expenses associated with clients becoming confined to a qualified care facility that meets the insurers’ eligibility requirements. The benefits are available, in general, if the policyholder can’t perform two of six “activities of daily living,” such as eating, bathing and dressing. The payments generally last up to 60 months, or until the annuity with the doubler has no more cash balance. Regular payments will resume, however, if the annuity’s cash value hasn’t been exhausted.
To be sure, these enhanced benefits aren’t long-term care (LTC) insurance and shouldn’t be used as a substitute. Adding health care costs to the retirement conversation you have with your clients could make sense, however.
About 19% of clients’ number one concern later in retirement (after 10 years) was having to move out of their home to live in assisted care, according to the American Institute of Certified Public Accountants’ survey referenced above.
Consider also that national monthly costs, on a median basis, were $3,628 for a private, one bedroom room in an assisted living facility, and $7,698 for a private room in a nursing home, according to the Genworth 2016 Cost of Care Survey, conducted by CareScout.2 You can find annual costs by state here. Annual costs are rising by more than 2% and 3%, respectively, based on five-year compound annual growth rates.
What about the riders themselves? They aren’t for everyone. Clients with enough assets to generate the monthly income they need during retirement probably could do without an income riders’ added annual expenses.
But for those projected not to have enough income to cover future expenses, guaranteed income riders may have a role to play. This is particularly the case for those closer to retirement than not, as there’s a shorter time window to generate enough returns from assets.
In a case like this, you may consider a fixed indexed annuity with the guaranteed income rider – with the rider, then, acting as another source to cover income and expenses as needed beyond Social Security and other forms of income.
It is important to note that with the purchase of any additional-cost riders, the contract’s values will be reduced by the cost of the rider. This may result in a reduction of principal in any year in which the contract does not earn interest or earns interest in an amount less than the rider charge. In all years the fee will impact the contract’s value negatively. Any distributions are generally subject to ordinary income tax and, if taken prior to age 59 ½, a 10% additional federal penalty.
If you are a financial advisor and have any questions about these riders, don’t hesitate to call us at 800.440.1088.
1 2016 Mid-year AICPA CPA Personal Financial Planning Trends Survey https://www.aicpa.org/InterestAreas/PersonalFinancialPlanning/Community/DownloadableDocuments/PFPTrends-Survey-MidYr.pdf (accessed June 14, 2017)
2 Genworth 2016 Cost of Care Survey, conducted by CareScout®, April 2016 https://www.genworth.com/about-us/industry-expertise/cost-of-care.html (accessed June 14, 2017)
Shurwest is an independent distribution company based in Scottsdale, AZ. With transparency and accountability we empower our advisors by delivering industry-leading, consumer-focused retirement strategies that use a variety of investment and insurance products while providing cutting-edge education, marketing and practice management support.