Swap Your Income Rider for a SPIA: Shootin It Straight With Stan

Welcome to Shooting It Straight With Stan. I am your host, Stan The Annuity Man, America's Annuity Agent, licensed in all 50 states. So glad you joined me for this topic, which is a good one.

This topic came from my good friend, John Lenz. I call him the Annuity Architect. If you’re not familiar with John, you should be. He’s one of the smartest people in the annuity world — including myself, big statement. I do a podcast called Fun With Annuities that you can find on all major podcast platforms, and John is a frequent guest on that podcast because he’s so darn smart and makes me look good. Anyone who makes me look good; I hang out with. You know what I’m saying? It's kind of like a lead singer and the lead guitarist being Jimi Hendrix or Eddie Van Halen. That’s John Lenz.

He and I were talking the other day, and he told me about a case he was working on. I’ve seen these cases before, but it’s worth discussing with you: exchanging your Income Rider for a SPIA — a Single Premium Immediate Annuity.

The Concept of Exchanging Income Riders for SPIAs

Now, that’s a loaded statement, so we’ve got to dig in a little bit here. It’s not as simple as saying, “I have an Income Rider; I’m just going to flip that thing to a SPIA.” You don’t need an agent to do that either. It’s got to work in your favor for that to happen mathematically, and I will go through that.

John told me about a great case where they looked at an Income Rider attached to a Variable Annuity. This can apply to both Variable Annuities and indexed annuities. An Income Rider, in simple terms, is an attachment to a policy, be it a Variable or Indexed Annuity, that guarantees a lifetime income stream. You can set it up as life or joint life, etc. But it’s a separate calculation from the accumulation value.

Let me slow down for a second. The accumulation value, in real terms, is the real money. In a Variable Annuity, that’s the separate accounts — mutual funds. In the Indexed Annuity world, that’s the index option strategy — caps, spreads, and participation rates — the walkaway amount.

If you draw a line down a blank sheet of paper, visually, the left-hand side is the accumulation value side. Variable Annuities are the mutual funds or separate accounts; for Indexed Annuities, they are the caps, spreads, and participation rates. On the right-hand side is the Income Rider, which is a separate calculation.

Typically, the Income Rider value is higher than the accumulation value. Why? Because the annuity companies, which are issued by life insurance companies, want to keep your money. The Income Rider value is not transferable. That amount in the Income Rider side cannot be transferred if you decide you want to transfer the money.

How to Determine If You Can Transfer to a SPIA

Now, we’re getting to the meat of the matter. How do you determine if you can legally, morally, and ethically transfer the value to an immediate annuity? Here’s how you do it: You need to take the accumulation value of the policy — not the Income Rider value — and ask the company you’re with to give you two guaranteed contractual numbers:

1. The Income Rider number, which is what the lifetime income stream would be.
2. The annuitization number — the SPIA number — if you took the accumulation value and converted it into a Single Premium Immediate Annuity. Most of these policies will allow you to do that.

Then, go to The Annuity Man. Schedule a call with us, and we’ll walk you through the process. You can run a Single Premium Immediate Annuity (SPIA) quote using the accumulation value — the walkaway amount — the actual money amount. This could be from a Variable Annuity (mutual funds or separate accounts) or from an Indexed Annuity (caps, spreads, and participation rates). You can run that number on our site and see what the quote looks like.

Case Example: Income Rider vs. SPIA

In this case, John told me that they looked at the Income Rider number and the SPIA number, quoting all carriers, and found that the SPIA number beat the Income Rider number. That’s incredible. It shouldn’t happen, but it did. And it was a massive difference in the client’s favor. The guaranteed lifetime income rider amount from the Variable Annuity was much lower than the amount using the accumulation value in a SPIA.

Here’s what it all comes down to: Annuities are math. When you do a transfer — and by the way, let’s talk about transfers for a second — if the annuity, whether a Variable or Indexed Annuity, is inside an IRA, it’s an IRA-to-IRA transfer. That’s a non-taxable event. If it’s in a non-IRA account, it falls under IRS Section 1035. Look it up if you’re curious. Section 1035 allows you to transfer from one annuity to another as a non-taxable event. In any case of transferring annuity to annuity, it’s a non-taxable event.

Annuity Transfers and Best Practices

However, the annuity industry doesn’t want agents and advisors to flip and churn accounts, meaning transferring to create a commission for the agent or advisor. Regardless of your thoughts on it, the annuity industry cares about the consumer, and they try to prevent this nonsense. How do they do this?

Here’s how: When you transfer from one annuity to another, whether it’s IRA, Roth IRA, or non-IRA, the application has a side-by-side comparison of the annuity you’re coming from and the annuity you’re going to. For the annuity, you will have to provide a higher contractual guarantee, not a hypothetical or theoretical return. It must offer a higher contractual guarantee when moving from the old annuity to the new one.

In John’s case, he had to show the receiving annuity company that not only was the income rider amount not higher than the SPIA amount using the accumulation value, but also that the Single Premium Immediate Annuity quote from the old carrier wasn’t as high as the SPIA quote from all carriers. He had to prove both of those numbers.

Why the Process Matters

You may be thinking, "Stan, that’s a lot." Yes, it is. And it should be. There should be major hoops to jump through before deciding to move from one annuity to another, knowing that the Income Rider value isn’t transferable and that you need to factor in surrender charges for the accumulation value.

There are no shortcuts here. If games are played by the agent or advisor filling out the application, that’s a problem the agent and advisor will have to deal with, and it’s not fun. It could lead to losing their license, and it should. It’s like filling out a mortgage application fictitiously. You can’t juice the numbers on a side-by-side contractual guaranteed comparison.

Next Steps for Evaluating Your Income Rider

So, what now? If you have an income rider attached to a Variable or Indexed Annuity, I encourage you to go to The Annuity Man and schedule a call. It’s a simple process. One of my team members will walk you through the side-by-side comparison.

Spoiler alert: Most of the time — I’d say over 70% of the time — with Income Riders, you won’t be able to beat it by transferring the accumulation value into a Single Premium Immediate Annuity (SPIA), quoting all carriers. But isn’t it worth the exercise? Isn’t it worth looking at your Income Rider that you’ve been paying fees on every year to ensure you have the highest contractual guarantee?

It makes sense to me. It’s like having an income warranty. We’re providing this at The Annuity Man for free, under no obligation. All we’ll do is run the comparison and tell you if staying where you are is the best option. In most cases, we’ll say, “Hey, you’re good. Stay there and turn on the Income Rider when you need income.”

But there are cases, like the one John Lenz worked on, where you might have a situation where the Income Rider isn’t competitive, and you can do better with a lifetime income guarantee using a SPIA.

Conclusion

If that’s the case, it’s a great deal because you’re transferring from the variable or indexed annuity with the income rider to an Immediate Annuity after we’ve proven the higher contractual guarantees. You’ve stripped out all the fees that come with the Income Rider, and 99% of the time, those Income Riders are life with a cash refund. That means when you pass away, whatever’s left in the accumulation value will go to your beneficiaries — no tricks, no games.

We mirror that structure with the SPIA. I know I threw a lot at you, but it’s incredibly valuable to those with Income Riders who are unsure about their options. We want to clarify that for you, so you no longer have to think about it.

And remember, 70% of the time, we’ll say, “You’re good. Stay where you are.” But for the other 30%, there’s an opportunity to improve your situation.

That’s Shooting It Straight With Stan. I’m Stan The Annuity Man, America’s Annuity Agent. I’ll see you next time!