Last week's post, 10 Fixed Index Annuity Income Calculation Variables, introduced ten potential variables that are used to calculate the income, or lifetime retirement paycheck ("LRP"), amount that you will receive when you purchase an income rider with your fixed index annuity ("FIA").
It's important to emphasize that all ten variables won't apply in every situation. Six are contract-dependent and four are situational. Situational variables, by their nature, occur after the fact, and, as such, often cannot be anticipated when deciding which FIA(s) to purchase. Having said this, each variable needs to be taken into consideration by a retirement income planner when analyzing and selecting FIA income riders and products that may be appropriate for a particular situation.
Contractual Variables
Contractual variables are addressed in various sections of a FIA contract. The six contractual variables are as follows:
- Premium bonus availability
- Income account value interest rate
- Number of years income account value interest rate is in effect
- Maximum lifetime income withdrawal percentage
- Surrender charge schedule
- Premium bonus recapture provision
Variables #1 and #6, premium bonus availability and premium bonus recapture provision, are directly related. When offered, premium bonus provisions appear in the base contract since they affect the accumulation value regardless of whether an income rider is also purchased. Variable #5, surrender charge schedule, is also included in the base contract. Variables #2 - #4 are only applicable to income riders, and, as such, will be included in the income rider section of a FIA contract.
Situational Variables
Situational variables, although they will trigger one or more contractual provisions, arise as a result of an action on the part of the contract owner. The four situational variables are as follows:
- Initial and subsequent investment amounts
- Lifetime payment election date
- Accumulation value withdrawal amounts and timing of same
- Death of owner prior to commencement of income payments
The first three situational variables are controllable by the contract owner while variable #4, death of the owner prior to commencement of income payments, is unpredictable. Variables #1, #3, and #4 affect both the accumulation value and the income rider payout. Variable #2, lifetime payment election date, is unique to the income rider.
Now that we have made the distinction between contractual vs. situational fixed index annuity income calculation variables, we will continue our exploration of each of these variables in the next several posts, beginning with contractual variables.
