Annuity Income Riders: To Win, You Must Lose

william reynoldsAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

I analyze the math of annuity income riders and how you pay the insurance company to draw down your own assets. It is highly unlikely the insurers will pay a dime, which makes those riders questionable.

I’ve been getting many questions lately about the guaranteed income that some annuities offer and how they work. It is quite confusing. At their most basic level, a lifetime-income rider is an optional addition to annuity contracts that insurance companies offer. The rider typically guarantees income for as long as you live (or as long as you and your spouse live), for which you pay a fee. If your account balance goes to zero, then the insurance company continues to pay your guaranteed income; but if it never hits zero, then you end up paying extra to access your own money.

I will use a hypothetical example of a typical variable annuity with a lifetime income rider to illustrate the point. Unfortunately, this is fairly math-heavy, but there is no other way to explain this!