FEIA: 2 of 3 – Lifetime Income Benefit Riders

Fixed Equity Indexed Annuities

Part 2 of 3 – Lifetime Income Benefit Riders

One of the best benefit improvements that have been added to FEIA’s is the Lifetime Income Benefit Rider (LIBR).  Initially started in 2007, the LIBR offers the annuitant a contractual calculation that determines the eligible Lifetime Income Benefit (LIB).  The  Income Account Value (IAV) is  in addition to the Account Value (AV) .  Unlike the AV, the IAV does not have a surrender value.  However, if it is exercised, the LIBR can provide income for the rest of the annuitant’s lifetime (or joint lives).

How does the LIBR grow?  Unlike the AV which, for example, might be linked the the S&P Index, the LIBR is a fixed interest rate that compounds for a period of time set at the policy start date.  The LIBR’s interest varies from 4.5% to 8%, can be compounded for a number of years that are generally between 10-20 yearsFor example, an annuitant opens a policy for $100,000 that has the LIBR at 7% compounded for 20 years.   The LIBR has the potential to grow to $404,000 guaranteed if no withdrawals are made during the 20 years.

Although it is not a hard fast rule, if the AV grows by more than 7% compounded, the annuitant will likely use the AV.  However, if the AV grows by less than 7% per year, then the annuitant might choose to use the LIBR.  The important point is that the annuitant makes the choice whether to use the AV or the IAV, whichever is in his/her best interest.

Is the LIBR annuitization?  Although the LIBR guarantees to provide an income for life, it is not annuitization.  For example, Mr. Smith exercises his LIBR at age 67 on his life alone and passes away 2 years later.  Mrs. Smith would receive the annuity’s AV less any payments that had been paid to Mr. Smith before his death.

Is there a cost for the LIBR?  Although the FEIA’s do not charge fees, the LIBR is an optional rider chosen by the annuitant and has a fee in most cases from .45 to .9%.  The fees are taken from the AV each policy year.

In a volatile market, the FEIA AV provides the potential for better returns without loss of principal (See part 1).  However, if the market continues to sputter for some length of time, the LIBR provides a guaranteed growth and guaranteed income that you cannot out live.  One should consider an Indexed Annuity with the Lifetime Income Benefit Rider as part of the solution for your Retirement Savings Plan.

 

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