What Is Lifetime Income Benefit Rider?

Hi, I’m Stan The Annuity Man. Today's topic is What Is a Lifetime Income Benefit Rider? We’re going to go over this guarantee for future income so you can understand how it works and whether it fits your income needs down the line. Also, be sure to watch this video on Best Variable Annuity Income Riders because it covers both the Variable Annuity side and the Indexed Annuity side.

Understanding Lifetime Income Benefit Riders

So, let’s talk about lifetime income benefit riders. We’ll cover a lot of information today, so hang in there—it’s worth your time to understand how these work. We’ll discuss what they are, the structure, what they solve for, what product types they attach to at the time of application, and why that matters. We’ll also dive into the limitations and benefits of a lifetime income benefit rider, how to get a good quote, how to find the best one for you, and where it fits in your portfolio. And if you hang in there until the end, I’ll tell you how to get a free copy of my book on the topic.

What Is a Lifetime Income Benefit Rider?

Okay, so what exactly is a lifetime income benefit rider? You’ve probably heard the term “rider” before. When you hear “rider,” think of it as an attachment to a policy. You have the policy, and then you attach something to it. Imagine buying a mobile home and adding another unit to it—kind of like that. An Income Rider can be attached to either a Variable Annuity or a Fixed Indexed Annuity, and in the past, Multi-Year Guarantee Annuities were also common.

But now, the primary two are Variable Annuities and Fixed Indexed Annuities. If you visualize it on a piece of paper, you have one side for the accumulation value (the growth side). For Variable Annuities, it’s market growth; for Fixed Index Annuities, it’s more like CD growth. On the other side is the guaranteed income benefit rider, a separate calculation. When you get your statement, you’ll see two different valuations: one for the accumulation value and one for the income benefit rider. This is because the income benefit rider calculation only applies to your first payment when you choose to take it, and it’s based on your life expectancy at that time.

How Lifetime Income Benefit Riders Work

So, let’s talk about how lifetime income benefit riders work and what they solve for. Essentially, they’re designed to guarantee lifetime income in the future when you’re deferring. Remember, a Single Premium Immediate Annuity is for income right now. However, an Income Rider attached to a Variable or Fixed Indexed Annuity is for income later. So, if you need income in five, seven, or nine years, you can shop around to find the best contractual guarantee for your specific situation.

Now, it’s important to note that a lifetime income benefit rider often has a high percentage that might remind you of the Jimmy Carter era when interest rates were sky-high, and you could get 12% CDs or 8% CDs. When you hear someone say, “I can get you an 8% annuity,” don’t get too excited. They’re referring to an income benefit that grows by 8%.

Let me stop you right there. You’re probably thinking, “8%? That sounds great, Stan!” But hold on. It’s monopoly money—it’s only used to calculate the income at the time you start it. So, if the income grows by 8% for seven years and you begin taking payments, that 8% goes away, and the fee for that Income Rider is deducted from the accumulation value for the life of the policy. That’s both good and bad, right?

At the end of the day, if you're buying a lifetime income benefit rider attached to a Variable or Fixed Indexed Annuity, you're buying a guarantee—a lifetime income guarantee and the transfer of risk. In my opinion, as Stan The Annuity Man, the Income Rider is your decision, and I’d suggest focusing on that contractual guarantee.

The Benefits of Lifetime Income Benefit Riders

Now let’s talk about the benefits of lifetime income benefit riders. Since it’s called a lifetime income benefit rider, you can probably guess it has some good benefits—and it does—but there are limitations too, which we’ll get into later.

The main benefit is that you can defer your income for a long time—seven, ten, or even more years. You just have to tell me exactly what you want the money to do. Remember the two important questions: What do you want the money to contractually do, and when do you want those contractual guarantees to start? For example, if you and Marge need income in 11 years, I can quote all the lifetime income benefit riders and deferred income annuities to find the highest contractual guaranteed payout for you.

Income Riders can be set up on a single life or joint life basis. And if you pass away, 100% of the money goes to your beneficiaries. No, the annuity company doesn’t keep any money—everything goes to your loved ones.

Additionally, some Income Riders allow the growing percentage to be used as a death benefit. This is beneficial, especially if you’re someone who might have trouble qualifying for life insurance. Income Riders are guaranteed issue, so you don’t have to go through any medical testing.

There’s also something called confinement care—which is different from long-term care. If you can’t perform two of the six daily activities (like bathing, dressing, etc.), the rider can enhance the payout or even double it. In a perfect world, this should be secondary coverage, but if you’re a heavy smoker or have health issues, this may be your only option.

Limitations of Lifetime Income Benefit Riders

Now, let’s talk about the limitations. As with anything, there are some drawbacks. Sales pitches often gloss over the details, and at the end of the day, it’s a contract. When you read the annuity contract, that’s what you’re going to get. There’s no fairy dust, no unicorns—just a contract.

The fee for the Income Rider is taken out of the accumulation value for the life of the policy. This means that as the rider grows by a specific percentage, the fee also increases by that percentage. Once you lock in the lifetime income, that fee is locked in and will be deducted from the accumulation value.

One of the disadvantages with Variable Annuities is that when you attach an Income Rider, the investment choices (funds, separate accounts) are often limited. The annuity companies do this to hedge their own risk.

Also, if you take money out of the policy and you have an attached benefit rider, it affects both sides—the accumulation value and the Income Rider value. This means you’ll have less money to work with for your guaranteed income.

Structuring a Lifetime Benefit Income Rider

Typically, a lifetime benefit income rider can be structured for single life or joint life, and if you die, the remaining money goes to your beneficiaries. Keep in mind that lifetime income, regardless of annuity type, is a combination of return of principal plus interest. If you die early, your beneficiaries will get 100% of the accumulation value. If the income rider includes a death benefit, that will go to your beneficiaries as well.

How Do You Quote Lifetime Income Benefit Riders?

To quote lifetime income benefit riders, it’s a commodity quote. You shop around all carriers, and at The Annuity Man, we’ll quote all of them for the highest contractual guarantee.

What we’ve found, although this doesn’t always happen, is that Income Riders attached to Fixed Indexed Annuities often provide a higher contractual guarantee. The argument from Variable Annuity folks is valid, too, because the growth from separate account mutual funds often makes up for the difference. However, I’m all about contractual guarantees, and I’m focused on worst-case scenarios. We’ll quote all carriers for you and show you those contractual guarantees.

Where Do Lifetime Income Benefit Riders Fit in Your Portfolio?

Lifetime income benefit riders fit in your portfolio in three main ways:

Future Income – They’re primarily for providing a future pension with a guaranteed income that you know to the dollar.
Death Benefit – Some riders offer a death benefit, which can provide a legacy for your beneficiaries.
Confinement Care – They can provide a bit of coverage for people who can’t qualify for life insurance or long-term care, offering extra help if you get sicker.

Remember, 99% of the time, they should be used for future income.