Income Riders Are Costly
Income Rider Benefits Are Rarely Realized
Other Deferred Annuity Downsides For Older Consumers
Life insurance agents often encourage older consumers to purchase lifetime “income riders” for deferred annuity contracts. These “riders” are attachments to the policy and an annual additional fee is charged by the carrier. A lifetime income rider guarantees a certain level of income in future years for the lifetime of the policyholder. Evans Law Firm, Inc. generally recommends against deferred annuities but especially for seniors because of the high fees, lack of transparency, complexity and lack of liquidity. We also urge caution on policy enhancements like “income riders” which are sold as a means of guaranteeing future income, but, as explained in more detail below, tend not to be worth the cost. Because deferred annuities are so complex (particularly when they include income riders) the contracts may be sold based on incomplete information. Questionable or incomplete sales tactics and presentations and the policies themselves may constitute violations of insurance laws and elder protections. Cal. Welf. & Inst. Code § 15610.30 (definition of financial elder abuse); Cal. Ins. § 790 et seq. (Unfair Insurance Practices Act). Relief for injured seniors includes awards of attorneys’ fees and expenses for bringing your case. Cal. Welf. & Inst. Code § 15657.5. If you are over 60, live in San Francisco or elsewhere in the State of California and own a deferred annuity, call us today at 415-441-8669 (or toll free at 1-888-50EVANS) for a free review of your policy.
Doing The Math On Income Riders
To understand why “income riders” are not worth the costs paid over a long-term contract,  consider a hypothetical case of a 55-year-old married individual purchasing an “income rider” for an annuity that costs $500,000 with a contract interest rate of 5%. Assume the policyholder elects the lifetime-income rider just for his own lifetime (not to include his spouse’s lifetime) with income payments to start at age 65. If the policyholder annuitizes (turns on) the income at age 65, let’s assume he begins to receive $41,175 per year as his annual benefit (5% of the accumulated value). By the time he hits 75, he is concerned, as his income has not risen at all, but inflation has, and his cash value has dropped (because of the payouts). Fast forward again to age 85; he has the same annual income (with his buying power significantly diminished due to normal inflation) and his cash value has gone to zero. He unfortunately passes away a year later at age 86, so the insurance company had to only pay out the guaranteed income (guaranteed even when the policy cash value was zero) for one year of $41,175. His wife gets nothing going forward, and nor do his heirs. During the 30 years since the policy began at age 55, the insurance company has been collecting annual fees totaling hundreds of thousands of dollars (age 55 to 85 is 30 years of annual income rider fees of $11,529, 1.4% of the accumulated value of $823,505). That means the carrier collected $345,870 in fees, not including other fees like mortality and expense, administrative, or sub-account fees, and only had to pay out $41,175 when the accumulated value of the policy had dropped to zero due to the annual income payments since age 65. If the policyholder had died before the annuity payments began, he would have lost 100% of the income rider fees he had paid.
One investor reportedly said of this kind of arrangement: “If I took all my money and put it on a table in my kitchen and used 5% of it per year, it would last 20 years. Just sitting on my table collecting dust. And I will probably die before using all of it, so why would I want to pay someone for that?”
Further Disadvantages Of Annuities
- Difficult to exit. Some insurers make it difficult to exit an annuity contract by imposing high surrender charges or penalties. Surrender charges might amount to 10 percent or more of the value of the contract in some cases. Surrender periods may be as long as 15 years.
- High expenses. Upfront sales commission, annual administrative fees, cost of insurance charges, rider fees and other annual costs erode returns.
- Possibility of an insurer defaulting. Annuities are only guaranteed by the insurance company who issues the contract; there is no FDIC or other insurance covering your investment even if the annuity is sold to you by a bank representative.
If you are over 60 and live in San Francisco or elsewhere in the State of California and have a deferred annuity or universal life insurance contract, we can review your contract for free. You can reach Ingrid M. Evans at Evans Law Firm, Inc. at (415) 441-8669, or toll free at 1-888-50EVANS or by email at <a href=”mailto:email@example.com”>firstname.lastname@example.org</a>.
Some significant issuers and distributors of fixed, variable and fixed indexed deferred annuities in California are listed below. We are not in any way suggesting that any of these carriers or distributors has done anything wrong. The list is provided solely as a reference for our readers.
AIG/American General Life Insurance Company
Allianz Life Insurance Company of North America
American Equity Investment Life Insurance Company
American General Life Insurance Company/AIG
American International Group, Inc. (AIG)
American National Life Insurance Company
Athene Annuity & Life Assurance Company
Athene Annuity and Life Company
Aviva Life Insurance Company
AXA Equitable Financial Services, LLC
AXA Equitable Life Insurance Company/AXA US
AXA Advisors, LLC
Brighthouse Financial, Inc./MetLife
EquiTrust Life Insurance Company
Fidelity & Guaranty Life Insurance Company
Genworth Financial, Inc.
Genworth Life and Annuity Insurance Company
Genworth Life Insurance Company
Guggenheim Partners, LLC
Guggenheim Partners/Security Benefit Life Insurance Company
ING USA Annuity and Life Insurance Company
Jackson National Life Insurance Company
John Hancock Life Insurance Company
Lincoln Benefit Life Company
Lincoln Financial Group
Massachusetts Mutual Life Insurance Company
Metlife/Metropolitan Life Insurance Company/Brighthouse Financial, Inc.
Minnesota Life Insurance Company
Nationwide Investor Services Corporation (NISC)
Nationwide Life and Annuity Insurance Company
Nationwide Life Insurance Company
New York Life Insurance Company
Northwestern Mutual Investment Services, LLC
Northwestern Mutual Life Insurance Company
Northwestern Mutual Wealth Management Company
Pacific Life & Annuity Company
Pacific Life Insurance Company
Security Benefit Corporation
Security Benefit Group, Inc.
Security Benefit Life Insurance Company/Guggenheim Partners
Security Investors, LLC
Security of Denver Life Insurance Company/Voya
Transamerica Life Insurance Company
Voya Financial Advisors
Voya/Reliastar Life Insurance Company
World Financial Group Insurance Agency, Inc.
 This hypothetical and the quote at the end appear in an article entitled “Annuity Income Riders: To Win, You Must Lose” by William Reynolds, October 30, 2023, available online at www.advisorperspectives.com.