If you have a fixed-indexed annuity or are thinking of investing in a fixed-indexed annuity, then it is very important that you understand the difference between what is known as the income account value (IAV) and the accumulation value or “walkaway value”.
The income account value is associated with what is offered on many fixed-indexed annuities and is known as an income rider. The purpose of an income rider is to provide higher income than would normally come from the annuity, however this option most often has a fee of somewhere between 0.5% and 1.25% per year. It is important to understand that usually, the income rider fee is calculated based on the higher income account value (as opposed to the accumulation value), but is applied to the accumulation value (ex. the accumulation account, which is the value you would walk away with if you were to surrender the policy or cash out at the end of the policy may be $100,000. At the same time the income account value may be $150,000. The rider fee may be .95% per year, which would be calculated on the income account value of $150,000, but it is applied to the accumulation value). The fee isn’t necessarily a bad thing. If you never plan on turning on income then the fee would be a bad idea and the income rider itself would be a bad idea. However, if you plan on turning on income and using the income rider, then the fee is just the charge you incur to receive the enhanced benefit or income. The income rider is typically seen as a stated percent of interest for a specified amount of time (ex. 7% per year for 10 years).
Now we know what an income rider is and that it provides higher income than the product would normally provide. This is where the income account value comes into play. If we know that the income rider is typically calculated using our example in the last paragraph, then we can come up with what the income account value would be in any given year in which you were to turn on income from the income rider. Using our example if we had $100,000 in our accumulation value and we received 7% per year for 10 years, then at the end of 10 years we would have $196,715. At the same time our accumulation value may be growing somewhere around 3% per year to give us a value of $134,391 (keep in mind this value would be lower as we are ignoring any fees).
The $196,715 would be your income account value and is the value that the payout percentage is based on. The payout percentage differs with each carrier and product but typically goes up for the longer you wait to begin taking income and letting your income account value build. Again, using our example above, if we assume the payout percentage is 5.5%, then we multiply 196,715 by 5.5% and we know that our guaranteed income is equal to $10,819 per year.
The important thing to remember is that the income account value and the rider and interest associated with calculating the rider is only a value used to determine income. You will never actually be able to walk away with that income account value.