Income riders have become one of the most popular benefits ever to be added to fixed deferred annuities. Members of the National Association for Fixed Annuities (NAFA) report that more than 50 percent of people who purchase fixed deferred annuities also choose to add an income rider. These income riders are also known as guaranteed lifetime withdrawal benefits (GLWB) or guaranteed lifetime income benefits (GLIB).
The first income riders were introduced on variable annuity products in 2003, and became available on fixed and fixed indexed annuity products a few years later. Income riders provide consumers with a guaranteed income for life (similar to what annuitization provides), but without having to give up access to remaining principal — a feature that caused many consumers to shy away from annuitization in the first place. By purchasing an income rider on a fixed rather than a variable annuity, the consumer benefits from the income rider while also being protected from investment risk.
An income rider on a fixed or fixed indexed annuity allows a retiree to build a secure retirement income. The issuing insurance carrier guarantees the payout provided by the income rider for the life of the annuity owner, as well as bearing all of the investment and longevity risk on the guaranteed payout — which means that the consumer is completely protected from these risks. Some annuity carriers even provide for the income to substantially increase in case the annuity owner is confined to a nursing home, further sheltering the annuity owner from risk. In addition, the annuity owner retains access to the annuity's remaining value and continues to reap the benefits of interest credits to the annuity's value.
How income riders work
Again, a guaranteed lifetime income or withdrawal benefit is typically optional on a fixed annuity, and is added to the annuity by a rider. Whereas the annuity has an accumulation value to determine the death benefit or annuitization, the rider also adds a second value: the income value.
The accumulation value works just as it always does on a fixed annuity. The annuity owner's premium earns additional interest that is declared and guaranteed in advance or guaranteed through a calculation of the performance of an index (or indices), while at all times promising a minimum guaranteed interest. The unique benefit of a fixed indexed annuity (FIA) is that it has a built-in inflation hedge because additional interest is calculated based on a formula tied to the designated index (e.g., S&P 500).
