Understanding Income Riders
What Are Income Riders?
Deferred annuities are insurance policies where the policyholder pays a premium today to receive a series of payments back at some future date. Growth on the dollars paid, if any, is tax deferred. Income riders are attachments to deferred annuities that supposedly “guarantee” for the policyholder’s life a rate of increase in the income installments. We at Evans Law Firm do not provide investment or retirement advice or any tax advice whatsoever but our annuities and financial elder abuse attorneys have years of experience with annuities and life insurance and see every day how these products, including the income riders in them, often disappoint if not turn into outright financial disasters, especially for seniors. If you or a loved one has been the victim of financial elder abuse or have lost money due to income riders, surrender charges, market value adjustments, or other fees associated with an unsuitable annuity, call the experienced financial elder abuse and annuities lawyers today at Evans Law Firm, Inc. (415) 441-8669 and we may be able to help. We represent clients in the State of California.
What Are The Downsides To Income Riders?
Income Riders create a separately calculated fund held by the annuity carrier apart from the accumulated value fund in a deferred annuity. Although a separate fund, the principal in an income rider account is never available for withdrawal. Instead, the income rider account funds a “guaranteed” income for life payable only on a schedule determined by the carrier. The truth is that it takes years before any of that money is ever paid to the policyholder. In order to receive a financial benefit from an income rider, you need to start taking income early enough in your life that you have the opportunity to deplete your account (even if you don’t spend the money) and start getting into the insurance company’s pockets. If you die without having tapping into your income rider account, the rider – and the extra money you paid for it – will have provided no financial benefit.
Income riders typically cost 1-2.5% per year, which on a 2% contract return cuts or destroys your return on investment from day one (in addition to the effect of the commission you paid out in year one). Second, the guaranteed rate is not a rate of return on your money that you can ever access; it is really a phantom rate by which your income rider benefits increase annually if – and only if- you ever take them. Don’t be fooled into thinking the reported growth in the income benefit fund is yours. If you terminate your policy, you will forfeit all benefit of the fund. Also keep in mind these other important considerations:
- You cannot peel off interest from an income rider like you can a CD or bond. Once you begin your income draw downs, the income will always be paid to you in “scheduled” amounts, determined by actuarial tables.
- Any complete surrender will never include the phantom amount of the income rider “fund.” Instead, you will pay a steep surrender charge.
- Any partial surrender of accumulated value will reduce the base on which the income rider “growth” is calculated. You will also pay a steep surrender charge on any partial surrender.
- You cannot access the income rider calculation as a lump sum … ever! It will always be paid to you in the form of scheduled payments.
- You cannot transfer the income rider total to another annuity. If you do a replacement, you will lose completely any appreciation in the prior policy’s income rider account.
- Once you start taking income, the annual growth percentage stops. Wasn’t that what you bought it for in the first place?
- You can only use the high percentage income rider amount for income (or confinement care in select policies). You cannot, in other words, “surrender” income rider funds.
- The scheduled income amounts will be taxable to you as ordinary income.