Most of the insurance companies who sell indexed annuity would also offer a lifetime income rider.

When an indexed annuity is purchased, the fund is deposited into the client’s personal account, which is what I referred to as “real money”. And at the same time a separate account is created alongside with the same initial amount of fund as in the real money. This is what I referred to as “virtual money”, which is regarded as income-based value.

While the real money grows at around measly 3% because of artificial cap rate, the virtual money can grow at 6~7% guaranteed. That’s where the lifetime income rider comes in. Lifetime income rider normally comes with a charge, because it guarantees virtual money to grow at higher interest rate. The charge is always taken out from real money, never from virtual money, which will never be associated with the charges. Therefore, the charge is irrelevant for an income-focused annuity.

After virtual money grows in value in a set period, say 10 years, the value at that point will be the highest and is used as the base value for lifetime income withdrawal. The periodical income withdrawal, for example monthly, is a percentage of that base value, which is called payout percentage. The income withdrawal will be delivered to you for as long as you live.. <continue to Indexed Annuity: Virtual vs Real Money (2) >