Income Riders: Are They Worth The Fee? | 7 Figure Annuity Sales Podcast | Ep. 204
Podcast episode (host Chad Owen with Sam) examining whether income riders on annuities justify their fees. Key points: income riders can be worth the fee when the client’s primary need is guaranteed lifetime income; the fee size is only part of the decision — what the rider provides (growth credits, guaranteed lifetime and joint income, benefit-base mechanics) matters more; riders may charge roughly 0.7%–1.5% (commonly ~1%); fees may be assessed on account value or on a typically larger benefit/income base (which effectively raises the true fee); agents must verify brochure/illustration disclosures, perform thorough fact-finding and document worst-case scenarios. Practical checklist covered: what’s created/credited/calculated/collected/charged by a rider.
Chapters
On this week's episode, we're going to talk about income riders and are they worth the fees.
Hello, everyone. Welcome to this week's episode. I am Chad Owen, the annuity sales coach, host of the most. Which would be what? Anything pertaining to annuities right now. Right, okay. So we are going to talk about income riders and are they worth the fees? And I would say depends.
Because that's a good answer.
I wasn't expecting that answer.
I know. I will admit to throw that way.
But I will, I will.
Our income riders worth fees? Yes, if the income rider is required. So in other words, if it's a case where, you know, that's why I asked that question, is a plan for living or plan for dying? You want something that's going to give you income for the rest of your life, or you're primarily focused on passing the money onto your heirs when you die. Why the heck are you looking at me weird like that? You normally do. You're like. You're like the creeper man. If you had a mustache, I would turn you in right now.
I may have a mustache.
No, you won't. Tomorrow you won't.
I'm trying to go for the rooster look.
Then you will have to really find a new job because I will not have creeper mustache boy back here again. We had that for a while and we, all of our children listeners stopped listening and all of our children that were watching YouTube stopped watching. So if I'm just.
I'm just saying, if I. If I weren't on this thing, Chad, your views would just.
Sure, yes, okay. But income riders, honestly, the fee is a very small part of the equation. It is when it comes to what it provides.
Right.
So in other words, you have an income rider that charges 1%. What does that get you? Usually income growth, guaranteed income for life, often joint lifetime income. If you have a 1% broker fee, what does that get you?
Managed money.
It gets you nothing. That's it.
It's just managed.
No guarantees on it. A mutual fund starting off at what, five tenths of a percent, going up to 3%, what do those fees get you? Nothing.
Nada.
So if it is important to have income as one of the reasons why they want the annuity, then absolutely, it's worth it. Yeah. Now you want to make sure. And this is just me personally, I like having income riders where the income rider is based off of the fee of the account value, not the income value.
Yes.
I don't.
It's a rarity to find.
It is a Rarity to find. But I don't generally like it when they base the income. And most agents, if you ask that question. No, no, no, no. It's always off the count value.
No, it's not. Not mostly.
Mostly it's off of the income value. Yeah, benefit. So which is generally higher, the benefit base or the account?
The benefit base, almost all.
Is it truly a 1% fee.
Of what their income is being calculated?
Well, no, because if you took the true fee is generally off the account value.
Right.
That's, that's how it is in brokerage. Right. But if you're charging a 1% and it's coming off the income value which is in a tangible value, then it's.
Other than higher than 1% fee.
Exactly.
Yeah.
So that's my point. You know, in the rare circumstances I have to use an income rider where they calculate off of the actual account value, I will tell them, okay, hey, this is based, excuse me, off of the benefit base or the income value. I will tell them this is what it's off of. So technically if you took that what it is off the account value, it is quite a bit higher. Especially if you have something where the income value is really high and the. Because it's not a really good index strategy because it's a high paying income, you can have a very high fee. So I just, I'm very careful on that there.
And this is a good opportunity for a shameless plug. As we have mentioned this individual product, not by name, but throwing out teasers in the podcast before that actually has a mere 9/10 of 1% income rider fee off the account value, not the benefit base. And illustrations and I like this, their illustrations actually show what that fee would equate to in that given year. Most illustrations that you see show you what the fee is kind of at the top of the illustration. But then when you're looking at the actual tables of numbers, most don't have a column for the actual rider fee amount.
Yeah. What it charges you. Yeah.
You have to actually go in there manually calculate it.
Yeah. So I mean and I, it's amazing. We do polls and everything and there's so many people that will use index value to try and determine lifetime income and hope it works.
Right.
And that still is if come it is, it really is. Because you could say historically the annuity in the index averages 4%. Okay. Let's just say for you know, just to make it statement 4% and you say okay, so you could pour out 4%. What about the years where the index makes zero. Then you have 4% and the count value going down.
Right.
So I would just say, and here's the problem is, for years we had income rider annuities, and they're still out there right now, where your income value is literally the only thing that's worth anything there because you live for 15, 16, 17, 20 years. That death benefit's gone.
Yeah. Your account value is just eaten away by the income you've withdrawn and the fees you've paid.
But there are annuities out there that have good income growth and income for life and index growth.
Yeah.
So, I mean, you just got to know what you're doing. This is why it's so important when we're researching products that we don't take the marketer's word for it. We don't take the insurance company's word for it. I'm not saying they're giving you the wrong information. I'm not saying that at all. What I'm saying is you are responsible for what you tell the client, not what you heard from your marketer or your insurance company.
Right.
I can hear the perfect thing from my insurance company. They can explain everything accurately. But I am still responsible to know where that is in the brochure, where that is in the disclosure, where that is in the illustration. And I communicate that to my client.
That's right.
I'm not implying the brokers or the. Excuse me, brokers, the marketers or the insurance company are giving you the wrong information. I'm saying you need to read to know that what they're telling you is true.
That's absolutely right.
I mean, think about this. If Jesus in the Bible says, you know, or Paul says, be sure and check what you're hearing from the people that are speaking the word, you need to verify that.
Yeah.
You know, and so if that's happening, I'm definitely doing it with my insurance company and my marketer.
Yeah, true.
You know, and the reality is marketers are human. Insurance companies have humans there. So the more we continue to check on it together, the less likely there's ever going to be a mistake to our clients.
You got more checks and balances.
That's all that matters to me is I want to make sure my clients hearing the right information.
I love it. I made a note here that, that what you gain by having a rider is what you give up by not having one. So logically, then you go into, well, what, what do you.
That's really simplistic and deep at the same time.
Yeah, yeah. And I say that again for the.
Ones in the back.
What you gain by having a writer is what you give up by not having one. Yeah. And I created the five Cs here. What's created, what's credited, what's calculated, what's collected and what's charged. So I'll break this down. What's created by having the rider? The benefit base itself gets created by having the writer. If you don't have an income rider, you don't have the benefit base it's created and, or the balance.
There are a few companies out there that do have a benefit base without any.
That's true. They'll be automatically issued.
Yeah, but it's generally.
Yeah, most, in most cases, yeah. If you, if the rider is attachable or detachable, if it's not automatically issued within the product itself, then yeah, you would, you would be creating that benefit base, that income account value as some call it, which is again the actuarial number that gets used to determine the amount of guaranteed lifetime income.
I just want to state something real quick that's you went two full podcasts without doing air quotes and then you just did an air quote.
I'm back to my regular good old sled.
Anyway, go ahead.
What's number six lit on the first two? And I'm just now getting back up to snuff what's credited. Okay, so obviously if you're dealing with a fixed indexed annuity, you're already going to have index strategies. So when I talk about what's credited, I'm not even talking about index strategies. That's just cherry on top bonus. Great. What I'm talking about are the guarantee credits. Okay. So when you have a rider and you create that benefit base, a lot of times you have a benefit based bonus and a benefit based roll up rate. Those are guaranteed returns into the benefit base to grow a larger account than just the account value so that the guaranteed income that gets calculated can be higher. So that's what's credited. What's calculated is the income withdrawal calculated on a what is typically like larger account. The benefit base, like we said, is typically greater than the account value. So a 4% withdrawal on a larger account, if that's your payout factor, is going to be more money than 4% withdrawn on the account value. So there's benefit to that. What's collected, the guaranteed lifetime income. I don't know why I did air quotes there. But never to go backwards and sometimes can go forward, can go up. Not every income product has the ability for it to increase. But some do, which is great, but you're at least got a floor there. Whereas if you're just doing systematic withdrawals on the account value or taking RMDs, you're not guaranteed any specific amount and hopefully index credits so that you can at least take out as much as you did the year before.
And then what's charged? Some are free, some writers are free, but most fall between about 7/10 and 1.5% annually.
1.5 would be pretty high.
It would be high, but I've seen them there. I think your 1% to 1.25 is, is more common. If you get under a percent, you've got a cheap rider. If you get under 1%, it's calculated on the account value, not the benefit base. You've got a really cheap rider. Yeah. That isn't free. But again, if you're using a free rider, you're probably giving it up somewhere else.
Yeah. Because a lot of the free riders have no guarantees in them. So I mean, there's a couple out there that used to. I remember one company used to have a 4% guarantee on a free income rider, which was pretty crazy at the time. Yeah. But you know, nowadays, to me, income riders are so important if you want income for life. And I think we do our clients a great disservice if we're trying to present or promote safety and security, a peace of mind. But through the process of income, we can't guarantee anything. Right. I think that does a great disservice because if you think about it, let's just use logically. I have 253 million under management that I've written in annuities since. And you can't technically say under management. I've written 253 million since 2008. How much of that business do I have an opportunity to rewrite business later? Very little. So I'm literally killing all my future business. I don't have people that are getting to the end of their five years or 10 years and I can rewrite them, but I know I am making sure my clients are protected in the process to where they don't have to worry about anything.
Yeah, well. And I think it's worth just even considering what people have a perception about when they think of income. So if you've got somebody that's worked salary for the last 40 years to build up their retirement and now all of a sudden they get to retirement and the income strategy that you're promoting is, well, if the index Credit well, then you'll be able to take the same amount you did in the year prior. That's not how they were set up for the last 40 years. They had a set guaranteed salary that they were going to get. Maybe they'd get an extra bonus. The company did well. How many people would take a job that literally next year's income will be determined by how much we make this year.
Yeah.
It's like that's not a winning strategy for most people to have peace of mind.
Yeah. Peace of mind means no matter what, they don't have to worry about it or think about anymore. And that's really what it comes down to. And I know I go against the flow. If you probably talk to 100 agents, 35 will probably focus on income. If it's an income need with an income rider.
Right.
The rest will probably use an indexed annuity and hope it works out. Yeah. But there's a reason why I've been doing this for 18 years and I've never had a complaint ever with an insurance commissioner pertaining to any sort of. I didn't promise or didn't do what I said it was going to do because I use worst case scenario.
Yeah.
And I document everything like crazy. Yeah.
The problem. The problem. I think a lot of agents run into, Chad, with the whole worst case scenario thing is that they don't do a good enough fact finder. They don't go deep enough on the retirement income side to realize that in a worst case scenario they actually have an income need. They look surface level, see, right now they're okay. Then they sell just a straight fixed indexed annuity, no rider.
Yeah.
Worst case scenario on a straight indexed annuity with no income, doesn't look good at all. It just looks like a savings account.
Yeah. Yeah. Nothing. I mean, if. If this market falls for multiple years, which we don't know, it could go up. We don't know. But I don't want my clients having three years of nothing to show for.
Right.
So. Well, I think that pretty much covers that. Right?
Yeah, we beat that one.
Okay. Well, I hope you have a great day. And of course, happy selling.
Sam.
