Lifetime Income Benefit Rider or Annuitization?

by Hersh Stern - Revised Saturday, April 6, 2024

When placing premium into an annuity contract, you will be presented with a number of options, features, and benefits worth consideration. Among them may be the choice between a lifetime income benefit rider and annuitization. Let’s explore each a bit further to help clarify which, if either, makes the most sense for your financial situation.

Understanding The Lifetime Income Benefit Rider

The lifetime income benefit rider enables the annuity owner to receive a specified lifetime income amount regardless of the annuity’s underlying subaccounts’ performances, without having to annuitize or give up principal access. For most contracts, the amount of income received is typically 5% of the original premium amount paid. However, should the account’s balance increase, the amount of income received can actually increase.

The lifetime payments are deducted from the account’s actual value. Income payments received as a result of this rider are considered fully taxable as long as the account value is as much or greater than the original tax basis, or premiums paid minus total withdrawals to date.

The guarantee provided by the insurance company states the income will continue regardless of what the underlying account value is presently. And, upon the account owner’s death, the designated beneficiaries will receive the remaining account value in full.

What is Annuitization?

The term annuitization refers to the process by which the annuity’s cash value is turned into a stream of income, either for the duration of the annuity owner’s lifetime or for a certain period (i.e. 5 years, 10 years, or 15 years). The amount of income received is dependent upon the lump sum premium originally paid into the contract, current interest rates and the annuity owner’s life expectancy.

With annuitization, the account owner will no longer have access to the principal account value; they are simply guaranteed future income payments. In some cases, this annuity stream can pass to a designated beneficiary upon the account owner’s death, while in other cases, the account value is forfeited to the insurance company. Generally speaking, the more restrictions placed upon the account, the lower the income stream will become today.

A portion of each payment is considered return of principal until the original premium payment amount has been repaid to the annuity owner. The remaining portion of the payment is considered taxable at the annuity owner’s current tax rate.

For annuity owners seeking access to principal in addition to lifetime income, the lifetime income benefit rider may be more appealing than annuitization. However, for annuity owners seeking the opportunity for greater after-tax income, annuitization may be more appealing.

The Chicago Tribune full article can be found here.