The buzz in the indexed annuity world over the last two years has been the development of guaranteed withdrawal benefit riders. These types of secondary guarantees within an annuity contract are not new. In fact, they were originally developed by variable annuity providers in order to offer a guarantee within their subaccounts so that the contract owner could rest assured that they could receive some sort of future benefit from their variable annuities should their subaccount underperform. Now indexed annuity providers have developed their own line of products and riders and the result is that they can guarantee significantly more income than a variable annuity. The problem is that many advisors who have sold variable annuities don’t know that indexed annuity riders offer better guarantees.

There are a few factors that determine the guaranteed payout from an annuity with a GWBR. First there is a rollup rate. This is the rate at which the income account grows. Next is the payout percentage. This is the multiplier the insurance company uses to determine how much of the income account will be paid back to the owner in the form of an income. The next factor is the bonus to the accumulation or income accounts. Finally, the last factor is the charge for the rider.

Let’s compare these factors between a variable annuity and an indexed annuity –

	Variable Annuity	Fixed Indexed Annuity
Rollup Rate	4 – 7%	4% – 8%
Payout %	5%	5% – 9%
Bonuses	(Generally none)	0% – 11%
Fees	100bps – 500bps	0 – 50bps

This quick comparison shows that in all four areas that can affect a guaranteed payout, the indexed annuity wins in every category. I’ve personally compared dozens of variable annuity riders with indexed products and in every instance that fixed annuity will provide a higher guaranteed income.
Okay, so if you are a variable annuity guy, I know what you are thinking. A variable annuity will out-perform an indexed annuity so that’s how it can provide a higher payout.

I disagree. According to Morningstar the average base VA fees are 1.52%. This does not include the riders. The average income riders with all their features cost on average 2.2%. This brings the total charges to 3.75%. I’ve seen charges as high as 5%. If a variable annuity grossed 9% the net return would only be 5.25%. Most competitive indexed annuities will have income riders that guarantee a 7 – 8% roll up rate. This is why an indexed annuity will always outperform a VA with respect to guaranteed payouts from income riders.

There are also other factors like liquidity options, flexibility to start and stop the income, confinement waivers and income doublers, spousal continuation features and much more that tilt the scale into an indexed annuity’s favor. There isn’t any doubt in my mind as to the reason why income riders on indexed annuities are such a big buzz in the annuity market.