Equity Indexed Annuities Features Improve Return Rates and Flexibility

by Hersh Stern - Revised Friday, October 25, 2024

We are all aware that interest rates are nowhere near what they have been in the past, which has affected interest rates on both bonds and annuities. In response, insurers are introducing new features and riders to not only increase return rates on their equity index annuities but also add more flexibility to their products.

The current economic environment has pushed down treasury rates and there is little hope of them bouncing back until the economy is on a clear path to recovery. The Fed has made it clear that they will be keeping bond yields low for the foreseeable future which equates to low fixed and indexed annuity rates.

Despite these low rates, buyer enthusiasm for equity index annuities is growing. While fixed annuities have always appealed to consumers concerned about true diversification of their portfolio, much of the new interest from consumers can be attributed to creative features and riders being introduced by fixed annuity issuers.

These new features vary from new inflation-index linked income riders to annuities that pay out a death benefit, all of which can help you meet your retirement income needs.

New Income Riders

The volatility of the equity and bond markets is a key reason that you may be considering an annuity. Fixed and equity-indexed annuities can provide you with safe, sustainable growth and a regular income in retirement.

Income riders have been introduced that are offering roll-up options on a yearly basis which can be used to implement a dependable income stream for your future. In many cases, these income riders will also provide upfront bonuses when combined with a longer term equity-indexed annuity (often 10-17 years).

The majority of income riders are eligible for activation after a year and there are no surrender penalties associated with the income stream.

These new income riders also give you much more flexibility in controlling your income. The latest riders let you put aside any unused income which can later be taken as a lump sum payment.

For annuity buyers concerned about inflation, some of the newest riders allow for income growth once your rider has been activated. Linking the income stream to inflation indexes is one option. Another option is to add a rider that factors in an agreed upon growth percentage. Keep in mind that adding inflation protection will cause your initial payments to be lower.

Convalescent Care Options

Many new annuities have also added increased long-term care protection. For example, some annuities are offering “doublers” or “triplers,” which can be used for long-term care. These options can double or triple your income for a maximum of five years to help cover the cost of a nursing home or other long term care solution.

In order to qualify you must be diagnosed with cognitive issues by your doctor or fail two out of six activities required for daily life. In some cases you must be in a nursing home for the income leveraging to take effect, while others will cover home health care.

In most cases, the increased income amount will drop back to the original payout after five years. While not a perfect solution, these annuities can offer a certain level of comfort if you find yourself in need of nursing home care.

Death Benefits

An optional death benefit is being offered with many new income riders. This usually comes with an annual fee, which while burdensome, may be worth it if you are concerned that you may not have triggered the income payouts prior to dying. These riders pay out a lump–sum payment or a five-year payout to your beneficiaries.

These new features have made fixed and equity-indexed annuities even more appealing to consumers looking for a safe, regular and now flexible income stream in your retirement.

VIA: Bogleheads

MORE COVERAGE: Cornell University Law School