By Ken Nuss
Annuities come in different varieties, and each type offers different optional features. Since there are so many jumpers and options, it’s impossible to cover them all in one article. I’ve picked out four that may be particularly useful, depending on your situation and preferences.
Return of the Premium Rider
A return of premium endorsement (ROP) is an option available with certain fixed rate deferred annuities. Also called multi-year guaranteed annuity or MYGA, this product acts much like a bank certificate of deposit. You deposit a lump sum and get a guaranteed interest rate for a fixed period, usually two to ten years. Reinvested and compound interest in a non-qualified annuity is tax-deferred.
However, if you cash in your annuity early, during the redemption period, you will pay an early redemption charge, which generally decreases each year, hence the reason for this endorsement.
The ROP endorsement guarantees that you will not receive less than the premium deposit you made from day one, even after early surrender charges and market value adjustments. You get flexibility if life throws you a curveball and you need all your money.
If you choose this option, you will usually get a slightly lower interest rate. For example, one insurer offers a five-year annuity that, from October 2022, pays 4.95% without the rider and 4.70% with it.
Before committing, find out the amount of partial withdrawals without penalty that the annuity would allow. If they are generous enough, you may not need this option.
Three options for fixed indexed annuities
Fixed indexation annuities allow you to capture a portion of stock market gains while providing complete protection against losses. They credit interest based on the annual growth of a market index, like the Dow Jones Industrial Average or the S&P 500. You don’t lose anything in down years.
Depending on market performance and the annuity contract, you may not receive all the benefits in a positive year. This is because there is usually either a fixed capitalization rate, for example, no more than 11% increase in any given year, or a participation rate, such as no more than 60% of the gain of the index during a policy year.
Improved index credit options
With some fixed index annuities, you can buy a higher index capitalization rate or participation rate by paying a small annual fee, often around 1.00% to 1.50% of the allocated assets annually. If the amount of additional interest earned due to the higher cap or participation rate exceeds the fee charged, the decision has been won. If you are optimistic about the long-term stock market, consider this option.
Enhanced Death Benefit Rider
This rider typically creates a separate death benefit value that grows at a higher guaranteed annual rate than can be experienced with the actual account value for a number of years. When the annuitant dies, the beneficiary gets the higher of the two values.
As a rule, a small annual fee is charged. For example, an insurer charges 1.15% of assets, which is deducted from the account value. If you want to leave more money for your children, this rider may be worth adding.
Lifetime income rider
This helps generate more guaranteed lifetime income at a future date while giving you full control over your indexed annuity money. Because you don’t set the start date for income payments in advance when you purchase the annuity, you retain planning flexibility. You can choose to start receiving income for life, usually at age 55 or later, just for yourself or for you and your spouse.
Normally, when you convert an annuity into an income stream (rentization), its cash value becomes zero. But with this rider, you still own the full unused value of your pension. A huge plus, but there are downsides.
Most insurers charge about 1% per year of annuity assets to add an income rider. Thus, the value of your contract will increase more slowly than without the endorsement.
The amount of lifetime income is determined by the value of the income pool and your gender and age when you start receiving payments. The value of the income account typically grows at a guaranteed annual compound rate of 4-8%, so the longer you wait before you start receiving payments, the higher the income.
The Income Pool Value and the Cash Value of your policy are separate. The Income Pool value is only used to calculate your Guaranteed Income payments. It has no cash value and cannot be withdrawn. On the other hand, the value of the contract can be withdrawn or transmitted to your heirs.
After income begins, annual payments are deducted from the contract value. If this value ever reaches zero, the annual income payments are still guaranteed for the rest of your life, but the annuity would no longer have a cash surrender value.
If you die before the income is activated, your beneficiaries will receive the full value of the annuity contract as a death benefit. If you die after the income is activated, income payments will cease and your beneficiaries will receive any remaining value of the annuity contract.
Lifetime income riders vary widely from one annuity company to another. AnnuityAdvantage Income Rider Calculator provides an instant estimate of the future income you could expect from a lump sum bonus deposit.
The four add-ons covered in this article are optional. Even without one, you’ll still have the powerful benefits of an annuity. Sometimes, however, paying the extra fee for a passenger or feature can be a smart move.
About the Author: Ken Nuss
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed rate, fixed indexed and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.