Question: I’m looking to set up a guaranteed lifetime income stream to start sometime in the future. Which is better, longevity annuities or income riders? from Tom in Portland, Oregon
Answer: Excellent “head scratcher” Tom, and this is one of the most important questions currently in the world of annuities. What you are talking about is target date or income later planning. You want to plan a lifetime income stream to turn on in the future, and would like to be able to know to the penny what that transfer of risk income stream will be. The good news is that both income riders and longevity annuities can both get you to this contractual finish line, but are drastically different strategies. Let’s take a look at some important details of both products.
First of all, let’s have a brief annuity history lesson. Both income riders and longevity annuities haven’t been around too long. Income riders for a little more than 10 years, even though they really didn’t catch on until the 2008 market correction. Longevity annuities are even newer, with this strategy not becoming popular with consumers until about 2 years ago. In the world of financial products, these 2 strategies are infants, but are a direct reflection of the need for good future lifetime income solutions.
Income Riders are attached benefits to a deferred annuity (variable or indexed), and is a separate calculation from the investment or accumulation part of the policy. Most income riders guarantee an annual percentage growth during the deferral years, and that growth stops once you turn on the lifetime income stream. That lifetime income payment amount is primarily based on your life expectancy at the time you start the payments.
Income rider growth is not like yield on a CD or bond. You can’t peel off the interest or access the lump sum amount. You can only use this calculation for income and income only. That’s OK if you are planning for income later, but you need to know that an income rider is for income later planning and if you die, the income rider amount typically is not accessible as a death benefit.
A key feature to consider with income riders would be that these attached benefits are very flexible. You can turn the income stream on and off if needed, and you can change your plans to defer longer or start the income sooner. There is an annual fee for an income rider that is deducted from the accumulation value, and is paid for the life of the policy. Not all income riders are the same, so it’s important for you to fully understand how this attached benefit contractually works before buying.
These strategies are also called Deferred Income Annuities and Longevity Insurance. Longevity Annuities are, in essence, deferred immediate annuities. There are no fees, no market growth attachments, and the income stream can have tax benefits outside of an IRA because the policy is annuitized at the time you decide to take payments.
To combat inflation, you can attach COLA (Cost of Living Adjustment) riders to increase the income annually for as long as you live. In addition, you can defer as short as 2 years and as long as 45. Issue ages for non-IRA accounts can be as young as a newborn, and IRAs can hold longevity annuities for someone as young as 18.
The key point to remember about Longevity Annuities is that most contracts are rigid, and cannot be changed or transferred after issue. Longevity Annuities should be looked at as future pension strategies, and these simplistic products are growing in popularity because they are easy to understand, efficient, and effective. In addition, less than 10 carriers currently offer these fantastic strategies with the “big boys” like New York Life, Guardian, Principal, Mass Mutual, Northwestern Mutual, and Lincoln leading the way.
Which one fits best?
There’s no perfect answer for this question. I always show both Longevity Annuities and Income Riders for income later quote requests, then fully explain both strategies so that the client can make an informed decision. Always ask the agent to show you numerous quotes for each strategy, and from different carriers to see the highest contractual guarantees based on your specific situation.
Longevity Annuities and Income Riders both have their place for future income needs. Just make sure to fully understand the good, the bad, and the limitations of each specific contract so that you can choose the strategy that is best for you.
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