How A Guaranteed Lifetime Income Rider Adds Value to a Fixed Indexed Annuity
A Fixed Indexed Annuity (FIA) is a retirement savings tool that complements other pension plans like 401(k)s, social security benefits, and individual retirement accounts (IRAs). Many insurance and indexed annuity companies that offer FIAs have come up with an annuity product feature that offers guaranteed lifetime payments to your account. This feature is called a Guaranteed Lifetime Income Rider (GLIR). Once you procure this annuity, you can receive guaranteed regular monthly income for the rest of your life.
What is a Guaranteed Lifetime Income Rider?
Guaranteed Lifetime Income Riders (GLIRs) are a value added variant of Fixed Index Annuities (FIAs), which offers a guaranteed growth rate that is flexible from a financial planning perspective. Some index annuity companies offer this product by the name Lifetime Benefit Rider (LBR). No matter what you call them, they are something you have to know about to decide whether they are important for you.
Guaranteed Lifetime Income Riders (GLIRs) or Lifetime Benefit Riders (LBRs) are in essence an attached value added benefit to Fixed Index Annuities (FIAs). They reduce longevity risk and provide regular stream of lifetime income to the user. They are different from regular FIAs in that they guarantee income payments for life. Furthermore, they also transfer the risk of an annuity to the financial company to provide you a lifetime income that commences according to a mutually agreed specified period.
How does the Guarantee Lifetime Income Rider Work?
The concept behind Guarantee Lifetime Income Riders (GLIRs) or Lifetime Benefit Riders (LBRs) is in fact straightforward and simple. If you buy a GLIR or LBR with your fixed index annuity product, the financial company guarantees you annual, quarterly, or monthly income for your lifetime. You are guaranteed this regular income even if your investment accounts’ balance reaches zero.
For example, assume you invest around $300,000 in a GLIR or LBR with a 7% lifetime income benefit. The financial company will guarantee that you receive $21,000 per year for the rest of your life even if your account balance becomes zero. The company uses its own resources to pay you the amount to ensure that you do not outlive your investments.
GLIRs / LBRs have certain important elements that you must familiarize yourself to understand how they work.
A roll-up rate is a guaranteed rate that remains in place as long as you defer taking out your investment or turn the investment into regular income stream. This rate can be either compound or simple interest. You should note, however, that the roll-up rate is not the same as payout rate. The rate at which you receive your investment or payout rate could be higher or lower than the roll-up rate.
Period of Roll-Up-Date
The roll-up rate of the GLIRs / LBRs is offered for a specified period, after which they can either be linked to the equity index or renewed. For example, suppose that an income rider offers a guaranteed 7% roll-up rate for the first ten years of deferral. After the lapse of the specified period, the Insurance company renews the income riders at the same rate or they offer them at a different rate linked to the equity index as is usual in FIAs.
Some financial companies offer income riders at a roll-up rate that is for lifetime that stops once the investment matures. While, still other companies place restriction on the specified time when the income riders can be turned into a regular stream of income. You should know the exact period of roll-up rate so that you can plan your finances accordingly after retirement.
As pointed earlier, the payout rate can be the same or different from the roll-up rate. Suppose, you invest $200,000 in the GLIR / LBIR with a guaranteed return rate of 8% for the first ten years with annual payout rate of 6%. When your income rider total dollar amount reaches $400,000, you will receive $24,000 per year or 6% payout rate as specified in the contract. You will receive this income for your lifetime even if your investment balance depletes to zero.
GLIR or LBR Fees
Guarantee Lifetime Income Riders (GLIRs) or Lifetime Benefit Riders (LBRs) are offered at a certain contractual fee. For example, GLIR / LBR with 8% roll-up rate guaranteed for 10 years have a contractual fee that can range from 0.95% to 1%. You also want to be sure to know what this rider fee will be after the initial 10 year guarantee period.
In summary, there are several different companies that offer these riders, with a variety of choices with roll-up rates and payout rates etc. Be sure to compare and contrast at least a few different products to gain perspective.
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