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Income Riders Help Make Fixed Annuities More Attractive

In recent trends, fixed indexed annuities (FIAs) have gained in popularity thanks to several attractive perks, including participation in market gains.  But with the new fiduciary rule from the Department of Labor, advisors who sell these products will have to comply with the best interest contract exemption (BICE), a burdensome task. Unlike indexed and variable annuities, however, fixed annuity products do not trigger BICE application, meaning that the advisor would not have to declare their fiduciary status and execute a written contract with their client. According to a recent article from ThinkAdvisor, it’s for this reason that many insurers are adding new income riders to fixed annuities to make them more attractive to those previously more interested in variable or indexed products.

The new rules put in place by the fiduciary rule don’t actually go into effect until June 9, 2017, and further modifications to the rule may be coming, but that hasn’t stopped many advisors from preparing for the inevitable change. For most fee-based advisors, that means offering an attractive fixed annuity with an optional income rider. In response, many carriers have begun to offer these products, even though interest rates are currently still low.  Some of these new products are guaranteed at about 1.5% for the first seven years of the contract, with the potential for increasing after the first year. These market value adjustment features help transform a typical fixed annuity into a product that resembles the popular indexed variety, allowing the client to potentially participate in future market gains.

An income rider typically guarantees that a client will receive a certain amount of money throughout retirement, regardless of market performance. There are currently several different types of income riders. Guaranteed lifetime withdrawal benefit riders (GLWBs) guarantee that the client will be able to withdraw a certain percentage of the annuity benefit base, that has been growing by a guaranteed amount over the deferral period. The longer the base account is allowed to grow, the larger the withdrawals will be in the future. Also, clients should be made aware that all withdrawals must stay within the predetermined limits. Some contracts provide for termination of the feature if the client takes excessive withdrawals.

A lifetime income benefit rider (LIBR) is a rider where the annuity carrier agrees to pay income over the client’s lifetime in the form of an annuity. The income collected once the client annuitizes the contract is drawn from a benefit base. The carrier uses the client’s life expectancy to determine the value of the guaranteed income payments. This is particularly attractive to clients looking for a steady stream of income that is guaranteed, regardless of how long they live.

Recent fixed annuity product developments have shown that advisors and firms are preparing for the implementation of the DOL fiduciary rules. For many, that means selling products that avoid its application, and income riders will likely remain a key feature.

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