Fixed Index Annuity Income Rider Explained

by Hersh Stern - Revised Thursday, October 31, 2024

With interest rates at all time lows annuity buyers are often tempted to jump at promises of fixed fixed index annuity (FIA) rates as high as 7% and 8%. Be careful here. A FIA income rider interest rate quote is not the same as an interest rate you may be earning in a certificate of deposit or multi-year deferred annuity. It is important to understand what an income rider rate quote is.

Income riders on fixed index annuities are contract benefits designed to guarantee a specified growth rate, represented as a percentage. They are optional riders available for an annual fee. How do these riders impact your cash balance or income stream?

Let’s take a look at a simple example; your annuity contract specifies a 7% or 8% growth rate. It may seem logical on the surface to assume that this 7% or 8% growth rate applies to the cash balance portion of your annuity. However, income riders only apply to the income produced by your annuity contract. It is not the growth rate of a lump sum that you can withdraw in one check, for example. It is a rate that only applies when you begin to draw an income stream from your annuity contract.

Income riders do offer benefits for retirees targeting a specific income planning time frame. However, it is important to understand that the rate quoted with this rider is not tied to the performance of the benchmark index in your account.

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