In this review, we will discuss the new 7% income rider introduced by American Equity, how it breaks down, and is it a good income rider.
In addition to American Equity’s 4% and 6.5% income riders, they have introduced a 7% income rider. The 7% income rider provides a guarantee 7% roll-up for 5 years, with the option of renewing the rider one time (election made between the 2nd and 5th contract years) for an additional 5 years. Essentially, the income rider is a guaranteed 7% per year for up to 10 years (if you elect to renew).
The 7% income rider also comes with a 0.9% fee per year. This is not uncommon as most income riders have a fee of anywhere between 0.5% and 1.25% per year.
It is important to understand that the income rider which correlates to what is called the IAV or income account value is not the same as your accumulation account. The income rider and IAV is strictly an account that is calculated to determine the income payout you will receive when you turn on income. It is essentially a phantom account, and you will never actually be able to walk away with that IAV. It is not growing your account and you are never going walk away with that amount. It is growing your IAV which is used to calculate your guaranteed income if you stay in the product.
Example: Client takes $100,000 and purchases an indexed annuity from American Equity with the 7% income rider. The annuity has a 10% bonus (which also only applies to the income account value); client decides to defer income for 10 years. In 10 years, the income account value has grown to $216,387 ($100,000 plus 10% bonus = $110,000 growing at 7% for 10 years). To determine the income, you now apply the payout percentage to the income account value. The payout percentage varies depending on the age you decide to take income, the longer you defer, meaning the older you are before you turn on income the higher the payout percentage is. In this scenario if client was 70 at the end of the 10 year deferral period his payout percentage would be 5.5%. $216,387 multiplied by 5.5% equals a guaranteed income payout of $11,901 per year.
Do we think this income rider is good? The answer is it depends. If you plan on taking income within 10 years, then this income rider might be a good fit. However, if you plan on taking early and not letting the income account value grow or if you plan on deferring for longer than 10 years, then it might not be the best fit. It all depends on when you want to turn on income.
It all depends on your individual situation and what your goals are. Different products offer different income riders and depending on how long you want to defer income, one income rider may give you more income in one situation, but that same income rider might give you less income in a different situation.