Issue link: https://resources.envestnet.com/i/1527488
Annuities as an Asset Class for Fee-Based Advisors l 30 © Envestnet 2022 With either method, the payouts on deferred annuities at different ages will generally be less than the payouts offered by an immediate annuity purchased at the same age. This can be expected since deferred annuities provide the advantages of liquidity and potential for upside growth in the guaranteed income. However, there can be exceptions. For instance, especially with a long deferral period, the insurance company can expect that some FIA owners will lapse and not take the guaranteed distributions from the FIA despite paying for the income rider. This takes the insurance company off the hook for making good on its guarantee, and through competitive pricing some of this benefit is returned to the other owners in the risk pool. With an income annuity, there is no flexibility and so no possibility for mistakes on the part of owners. As well, one difference from VAs is that upside potential for step-ups with FIAs may be more limited. The interest crediting method might even prevent the possibility of a step-up during the accumulation period with the rollup rate and benefit base approach. This could happen when a cap on credited interest is less than the rollup rate, especially when the optional rider fee would reduce the net cap applied. With the distribution phase as well, the capped gains could be less than the guaranteed withdrawal amount plus the rider fee, preventing the possibility for step-ups. For this reason, greater focus with FIAs should be on their minimum guaranteed protections without necessarily thinking that step-ups will provide further increases. The practical impact of the optional rider fee will be to reduce the contract value a bit more quickly leading to a lower death benefit than otherwise. But with the focus on income rather than accumulation, the rider fee is of secondary importance. The goal is not to find the lowest rider fee, as it would generally support a less generous guarantee, but to find the annuity that offers the most value through lifetime income to the individual for a given rider cost. When the individual survives long enough that the annuity contract value is depleted, the benefit continues to support lifetime income and the previous fee drag becomes irrelevant. The income riders on deferred annuities provide the ability to receive mortality credits, which can reduce the asset base required to support a lifetime spending goal. The rider fees paid for the income guarantee provide insurance that the spending will be protected in case someone experiences a combination of either living too long or experiencing sufficiently poor market returns that they outlive their underlying investment assets and cannot otherwise sustain an income for life. The income riders on deferred annuities provide the ability to receive mortality credits, which can reduce the asset base required to support a lifetime spending goal.