One of the unique features available with an annuity is the ability to attain guaranteed income for the rest of your life. Variable products like stocks, mutual funds, bonds, and variable annuities can increase OR decrease in value, which prevents any sort of guaranteed lifetime income. Fixed annuities are a unique vehicle that can guarantee income for the rest of your life regardless of the underlying performance of the annuity.
A common misconception of annuities is that when you enter an annuity contract, you are foregoing access to your account value for the rest of your life in lieu of lifetime income payments. While true with a certain type of annuity (Single Premium Immediate Annuity, or SPIA), there is another type of annuity that will guarantee income for the remainder of your life while also providing access to your funds in the event of certain events, such as being confined to a nursing home or being diagnosed with a terminal illness. Additionally, this same annuity would allow full access to the lump sum of the funds at the end of the contract should you want it.
You may be wondering what is this annuity, and how does the lifetime income work? A lifetime income benefit is used as a rider (optional feature) that can be added to a fixed indexed annuity (FIA). It permits the annuity owner to draw a steady stream of income that is guaranteed for the rest of their life, regardless of how long they live. Additionally, most lifetime income riders guarantee a minimum lifetime income, with the potential for that income to increase as you get older.
An FIA is an annuity that allows the annuitant to participate in a percentage of the gains in the underlying index (such as the S&P 500), while not experiencing any of the loss of principal in down years. The indexed annuity grows based on the performance of the index it is linked to, but it is not directly invested in the stock market, so it does not share in the stock market’s downside risk.
The lifetime income benefit rider can be added to many FIAs, allowing the annuitant to convert their annuity into a stream of income payments that will last for the rest of their lifetime. These payments are based on the annuity’s account value and the annuitant’s age at the time the rider is activated.
One of the primary benefits of a lifetime income benefit rider is that it can provide a minimum guaranteed source of income in retirement. This can be particularly valuable for those worried about outliving savings or simply wanting the peace of mind to know that their income needs are guaranteed to be met for life. Additionally, the lifetime income benefit rider allows the annuitant to convert a portion of their savings into guaranteed income that they can’t outlive, without foregoing access to the money in the event of an emergency such as being diagnosed with a terminal illness or confined to a nursing home. Many FIAs provide riders which would allow the annuitant to access their account value in one of these situations.
Adding a lifetime income rider may come with additional cost, typically in the form of a fee on the account value. It’s important to consider the cost, the interest rate and the length of the guaranteed payment when considering adding a lifetime income benefit rider to an FIA.
