When triggering an income rider could be a disastrous outcome
Scott Witt
Actuary and Fee-Only Insurance Advisor helping High Net Worth Individuals optimize life insurance and annuity decisions
Recently, a client came to me asking for a second opinion about a planned annuitization within their IRA. They owned a variable annuity that had a guaranteed income rider, and their plan was to start taking income in three years.
It seemed like a foregone conclusion to the client that exercising the income rider would be the optimal course of action.
Doing so would trigger guaranteed annual income of $28,586, and there would be little chance of that amount ever increasing due to the low likelihood of future investment returns outpacing the combination of the withdrawals and high expenses.
However, in this case, triggering the income rider would truly be a disastrous outcome relative to other options available in the marketplace.
The best alternative we identified was taking the cash surrender value and rolling the proceeds into a?commission-free fixed index annuity?with a guaranteed income rider. The?minimum?annual guaranteed payout starting in three years would be $51,413.
That starting amount could increase by up to the cap rate (currently 5.5%) each year, and future payouts would be adjusted by the then-current capped index performance. If future performance matches historical performance (which is not guaranteed) and if the cap rate continues to be 5.5% (which is not guaranteed), then the annual payment could grow to be upwards of $100,000.
Recall that the current “obvious” solution was a level guaranteed income of $28,586. Even if the S&P 500 Index never earns another positive return, the guaranteed annual income is boosted by 80% in the replacement annuity! And with future non-guaranteed performance, the replacement annuity could easily be double or triple the status quo.
The icing on the cake? The replacement annuity is with a company that has significantly stronger financial ratings than the current company.
Two major lessons here:
1. Don’t assume that exercising the guaranteed income rider on an existing policy is the optimal course of action - even if the guarantee is “in the money” - and even if the guaranteed income rider was the only reason the policy was purchased.
2. Don’t underestimate the power of eliminating agent compensation in boosting the attractiveness of insurance products, including annuities. In this case, eliminating commissions not only allowed for a higher payout rate but also allowed for a higher cap rate to potentially boost future non-guaranteed performance.
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I am an Actuary and a Consumer Advocate (not an insurance agent) who helps high-net-worth individuals with $100,000 or more invested in cash value life insurance or annuities to maximize the value of their policies.
High-net-worth individuals and their advisors hire me to help:
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Disclaimer
Witt Actuarial Services does not guarantee any specific level of performance, the success of any strategy that Witt Actuarial Services may use, or the success of any program. Information contained herein may become out of date; Witt Actuarial Services is under no obligation to advise users of subsequent changes to statements or information contained herein. There is no guarantee that the information contained herein is accurate. This information is general in nature; specific advice applicable to your current situation is only available through an engagement. Any perceived similarity with persons living or deceased is entirely coincidental.
Your expertise in navigating complex annuity decisions is truly commendable and invaluable to your clients.
Dedicated to helping you boldly navigate your financial future.
3 个月Hi Scott-thank you for writing this article. I went to the link to the blog but it is broken.