To illustrate, let me give you a quick example as illustrated below of how this works on a typical Income Annuity.
Let’s say that an annuity from Insurance Company A has an income rider that increases by 5% compounding until you annuitize. If your annuity premium was $300,000 and you want income from it to begin in five years, the income value would have increased to $364,562. This amount is not available for cash withdrawal, it is only used to figure your monthly payout amount.
While Insurance Company B has an income rider that increases by 6% compounding. If we started this annuity with the same $300,000, the value after the same five years would be $378,743.
Which contract pays you the most income? That’s partly determined by the payout rate.
If Company A with a value of $364,562 has a payout rate of 5%, the resulting annual payment would be $18,228, or $1,519 per month.
Now Company B with its value of $378,743 has a payout rate of 4.5%, meaning the payment would end up being $17,043 per year, or $1,420 per month.