I recently had the opportunity to meet with an executive from Athene and while we covered a lot of ground concerning a wide range of industry topics, there was a recent trend in the fixed indexed annuity market that we both found to be particularly worthy of attention. In the past, many FIA sales were all about the guaranteed income rider.
Recently, however, their number one selling annuity series is an accumulation FIA without an income rider. With the shift we are seeing from high guaranteed level income riders towards increasing income and accumulation FIAs, I wanted to share some information to provide an alternative annuity income approach offering a higher initial paycheck and potentially higher internal rate of return at life expectancy.
While most of our annuity sales are using FIAs with income riders, primarily those with increasing income to help offset inflation, there are times when income riders may not make sense. For instance, an income rider will benefit most for someone with longevity. They will be the ones who will live off mortality credits, also referred to as longevity credits, during their later years of life as they live past actuarial life expectancy.
I put together an annuity internal rate of return (IRR) calculator to demonstrate that the IRR on one of the top selling FIAs in the country is only 5.2% for a 65-year-old living to age 81. Yet, if this same client lives to age 94, the IRR is an incredible 10.80%.
Essentially, for someone not likely to live to or past life expectancy, an annuity income rider may not be as valuable for the client from an income perspective. This is especially true if it is an at cost income rider or an annuity with a lower initial withdrawal rate with the potential for increasing income.
Granted, some of these annuities have death benefit features which provide a valuable death benefit for those who prematurely pass.
For older clients or those less likely to live to or beyond life expectancy, we can consider using an Annuity Income Rider Alternative. This concept focuses on using an accumulation FIA with taking systematic free withdrawals. One benefit of using this approach is the potential for a much higher initial paycheck. Additionally, there is more flexibility in paychecks in specific years and the ability to stop the income if it is not needed.
With this, a potential downside to be mindful of is that there are no mortality or longevity credits, and the continuation of the income is based on the indexed performance.
In this example, I illustrated a $300,000 accumulation FIA for a 65-year-old starting free withdrawals next year. I illustrated taking $2,000 a month (8% premium withdrawal rate) beginning in policy year 2.
On a guaranteed basis the income runs out by age 78. Assuming the 4.75% fixed rate, the income exhausts at age 85 (past life expectancy for this client). Using the historical periods, the income lasts for life. Note I am using 50% allocated to the fixed account to dial down the illustrated growth projections.
As you can see, the Annuity Income Alternative not only provides a higher initial starting income stream, but it also provides a higher internal rate of return at life expectancy of 7.68%. For reference, the IRR at life expectancy for the previous example with an income rider offering increasing income was only 5.20%. While every client’s situation is unique, using an accumulation FIA with systematic withdrawals could offer more client value when compared to FIAs with an income rider.
With today’s higher interest rate environment, these concepts provide more benefits to your clients in form of higher growth potential and higher income. Many of our top advisors have had a record first half of the year in annuity production as their clients are looking to de-risk their retirement plans and make better use of under employed assets. While annuities with income riders can be a valuable tool, considering an Annuity Income Rider Alternative as an option for a client in less than perfect health looking for income may be worth offering.
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This material is intended for educational purposes only and is not intended to serve as the basis for any purchasing decision. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. The hypothetical example is shown for illustrative purposes only and is not guaranteed. The characters in this example are fictional only. Your actual experience will vary. Income benefit riders may be offered either built-in or for an additional cost. Remember to consider your client's individual circumstances and objectives when discussing their specific situation. Additional premium payments may be required to keep the policy in force. Withdrawals are generally income tax-free unless the withdrawal amount exceeds the amount of premium paid. Tax laws are subject to change. Clients should consult their tax professionals. Investment advisory and financial planning services are offered through LifePro Asset Management, an SEC Registered Investment Advisor. Registration does not imply a certain level of skill or training. Investments involve risk.