Your Private ANNUITY Quote Portal

Designed by an Agent with 24 Years in the Business

RATE GUARANTEE

By James Alden

My Agent Guaranteed Me a 7% Rate of Return

  Let me start by saying, Eee Gads...!  In 2009 the Insurance Industry began to actively market the concept of "income rider attachments" to equity indexed annuity contracts. These attachments to contracts, paid for on annual basis by the annuity holder, would guarantee to the policy owner a lifetime income payment at a time and point of their owners choosing.


Income Riders have proven a boon to the Insurance Industry over the last 5 years. After all, the public is genuinely concerned about increased longevity, stock market uncertainty and the general health of social security and pension programs. Income Riders were designed to provide comforting guarantees that you can know about in advance tht show that the annuity will be able to provide a specific income guarantee starting at a specific later time.


The consumers challenge with the income rider, however, is literally to ascertain what values represent what...as the rider is often confused with the "interest rate".


If you look at the chart below, the annuity account value is in the blue column , representing various rates of return over time. This represents your real money that can be cashed in penalty-free when the contract terms ends. 

RATE GUARANTEE

By James Alden

My Agent Guaranteed Me a

7% Rate of Return

Let me start by saying, Eee Gads...! In 2009 the Insurance Industry began to actively market the concept of "income rider attachments" to equity indexed annuity contracts. These attachments to contracts, paid for on annual basis by the annuity holder, would guarantee to the policy owner a lifetime income payment at a time and point of the owners choosing.

Income Riders have proven a boon to the Insurance Industry over the last 5 years. After all, the public is genuinely concerned about increased longevity, stock market uncertainty and the general health of social security and pension programs. Income Riders provide comforting guarantees that the annuity can augment lifetime retirement salaries. Equity Indexed Annuities that have income riders attached send you a statement each year, or each quarter, (depending upon the insurance company). 

RATE GUARANTEE

By James Alden

My Agent Guaranteed Me a 7% Rate of Return

Let me start by saying, Eee Gads...! In 2009 the Insurance Industry began to actively market the concept of "income rider attachments" to equity indexed annuity contracts. These attachments to contracts, paid for on annual basis by the annuity holder, would guarantee to the policy owner a lifetime income payment at a time and point of the owners choosing.

Income Riders have proven a boon to the Insurance Industry over the last 5 years. After all, the public is genuinely concerned about increased longevity, stock market uncertainty and the general health of social security and pension programs. Income Riders provide comforting guarantees that the annuity can augment lifetime retirement salaries. Equity Indexed Annuities that have income riders attached send you a statement each year, or each quarter, (depending upon the insurance company). 
  • Values Shown On This Statement

    There are two values on this statement to keep in mind.


    • Accumulation Value: The Accumulation Value is what you have earned thus far in the policy in interest and index credits.
    • Income Account Value: The Income Account Value (Benefit Base) representing a fictitious numerical multiple of your principal which is multiplied by a payout factor (withdrawal rate) when you decide to start lifetime income payments.
  • One is Real Money, One is Not

    Remember the meaning of the 2 values!


    • Real Money: The Accumulation Value will grow yearly at rates that look like 1%, 3%, 0%, 8%, 2%, 4%, 6%, etcetera, etcetera.
    • Fake Money: The Income Account Value will grow yearly at rates that look like 7%, 7%, 7%, 7%, 7%, 7%, 7%, etcetera, etcetera.

In the yellow column is what is known as the Income Account Value (IAV), which in this case is growing at 7% annually. (The Income Account Value will never be available for a lump sum distribution; it is only a "calculator" that is used as one component of the lifetime payment to be derived at a later point in time). 


When the annuity owner decides to start taking income, the annuity company will have a payout factor for the annuity owners current age; this will be multiplied by the Income Account Value in the year of the income election to derive the lifetime income benefit value.


Fair enough, right ?


The challenge for some annuity consumers facing an overly enthusiastic annuity salesperson is that sometimes the 7% growth rate applied to the Income Account Value will "become misconstrued" ( I am being overly conciliatory to the annuity agent here) as being the actual interest rate on the annuity owners funds.


After all, who wouldn't want a 7% guaranteed rate of return on their money every year, right?


So, this is certainly unfortunate. Even in 2021 I meet annuity owners who think they are receiving 7% guaranteed annually on their annuity money. Just not so.



Every Year, the annual rider fee of, for example, (say 1%), comes out of the Accumulation Value. This fee is the price you pay for the guarantees of lifetime income from your annuity at some point in a time of your choosing.

The lifetime income, should you start taking it, comes out of the Accumulation Value. Often the lifetime income is higher than what you are actually earning on your money, so you could, for example, be taking out a 5%, 6%, 7% or even 8% payout of your original principal each year from your own money. Obviously your principal will deplete over time if your earnings cannot keep up. However, if your savings run right out and you are empty, the insurer will continually pay you that lifetime income as promised.

This is the sizzle, of course, and the reason behind purchasing an income rider on an annuity. The calculation for how much money you can get for a guaranteed lifetime income is based on a payout factor that the insurance company has in writing. 
  • A popular insurer's payout factor for one of their annuities is shown below (see Lifetime Withdrawal Rate column).



































































  • A popular insurer's payout factor for one of their annuities is shown below (see Lifetime Withdrawal Rate column).
























On the other hand, the "guaranteed (unreasonable rate) return" issue can get conflated other ways as well.


If you take the same chart example again below, you can mathematically divide the income benefit listed by the actual account value in the corresponding year to get the rate at which the income benefit, on a percentage basis, is being paid. This is known as the "lifetime payout rate".

So, for example, at age 72, the benefit of $53,794 divided by the accumulation value of  $660,637 would yield a payout rate of 8.14%.


I mention this "payout rate" issue because, believe it or not, some agents have also  promulgated the payout rate as the interest rate as well.


Can you believe this?


I agree it is hard to believe, but I have seen it, and once again, sadly.


By the way, an income rider should only be chosen by an annuity buyer that is genuinely concerned about an income stream much more so than he /she is cornered about the accumulation of capital. There is usually a cost associated with the most competitive income riders and this cost will be deducted from your accumulation value.



You can see in the far right hand column above exactly what the insurer would guarantee you for a lifetime payment if you started in that particular year. All you do is multiply the payout factor by the value in the Income Benefit Base (or Income Account Value). This is a lifetime payment regardless of how long you live, and it is the virtue of income rider on an equity indexed annuity.

Now, now you can see how the agent offering the annuity can speak of several different "rates of return".
  1. The "rate of growth" in the Benefit Base (Income Account Value) showing the annual guaranteed growth rate.
  2. The "withdrawal rate" in the ledger from the insurer which is based on your age, or joint age with spouse.
  3. The "payout Rate", which is simply dividing your lifetime income amount by the original principal (yielding a fairly attractive percentage anywhere from 5% to 9%).
Here's the problem. You thought you were getting a guaranteed 7% rate of return on your money, but are you really? The real rate of return on your annuity is reflected in the accumulation value, not the income value. The accumulation value is not shown in the chart above. As discussed, the income value is fictitious and not a real lump sum of money — not ever.

Therefore, when your agent told you that you would get a 7% rate of return, was he referencing the:

  1. The rate of growth in the income account / benefit base?
  2. Your withdrawal rate from your income / benefit base?
  3. Or your payout rate?

I ALREADY KNOW WHAT YOU THOUGHT HE SAID, and chances are he probably mentioned all 3, and in the kufuffle of the moment all those numbers sounded better than what the current interest rates were paying at the bank, so you signed up!


The fact is, the actual interest rate that you are earning on your accumulation value (your real money) has nothing to do with any of these 3 stated rates.
In the heated environment of the sales transaction, it may not have come across that way. The rate of interest you are earning on your principal has to do with whatever index or interest choice your agent discussed with putting you into; whatever was available at the time.

Many clients do not realize this until way down the road and they find that their principal is declining because they are taking out more than they are earning, when in fact they were led to believe that their principal could never go down. The agent should have clarified that your principal will never go down due to the market failing, but it certainly can decline if you take out more than you are earning.

This is a rather disingenuous way of selling the annuity, and it is rampant. If there was a guaranteed 7% rate of interest currently in the market, I would be a very, very, very busy man. As it is, I may not be as busy as my fellow "line-blurrers", but a guaranteed 7%, 8% or 9% rate of return, of course, does not exist — at least not right now!

By the way, an income rider should only be chosen by an annuity buyer that is genuinely concerned about an income stream much more so than he /she is cornered about the accumulation of capital. The reason for this is because the income often exceeds the interest that is being earned your money.

On the other hand, you can see that in the chart above, that if you do have longevity concerns, the lifetime payment option, especially if you can put it off (defer from taking lifetime income) for a long while, becomes quite valuable in terms of how much money you get back, the longer you live.

Related ½ Truths

Share by: