What Is a Roll-Up Rate in an Annuity?

Annuities are financial contracts designed to provide a steady stream of income, often utilized for retirement planning. These agreements, typically with an insurance company, involve the policyholder making payments in exchange for future disbursements. Annuity structures vary, from guaranteed returns to market-linked performance. Annuities are complex, with various provisions and fees that impact their value. A thorough review of the contract is beneficial to ensure it aligns with financial goals and risk tolerance.

Defining the Roll-Up Rate

A roll-up rate in an annuity refers to a guaranteed growth rate applied to a specific value within the contract, known as the “income base” or “benefit base.” This rate is distinct from the growth of the annuity’s actual cash value, which is the amount available for withdrawal or surrender. The income base is a shadow account, solely used to calculate future income payments, and does not represent a cash value that can be withdrawn as a lump sum.

Roll-up rates are typically found in deferred annuities that include guaranteed living benefits, such as a Guaranteed Lifetime Withdrawal Benefit (GLWB) or a Guaranteed Minimum Income Benefit (GMIB). These benefits provide a guaranteed income stream, regardless of market performance or the actual cash value. Variable and fixed indexed annuities frequently offer these riders, which come with additional fees, often ranging from 0.50% to 1.50% or more annually, deducted from the actual cash value.

The purpose of the roll-up rate is to enhance the income base over time, increasing future guaranteed income. For example, an annuity with a $100,000 income base and a 7% roll-up rate would grow to $107,000 after one year, assuming no withdrawals. This growth continues for a specified period or until income payments begin, as defined in the contract.

If the annuity owner decides to surrender the contract, they would receive the actual cash surrender value, which might be lower than the income base, especially in early years or during market downturns. The roll-up rate provides a hypothetical growth rate for income calculations, offering predictability for future income planning.

How Roll-Up Rates Are Applied

The application of a roll-up rate to an annuity’s income base is determined by the contract’s terms. Many contracts apply the rate annually to the income base. This growth can be calculated using either simple interest, applied only to the initial premium or income base, or compound interest, applied to the previously accumulated income base for faster growth. The roll-up period is typically guaranteed for a specific number of years or until income withdrawals begin. Contracts may also include “step-ups,” where the income base can be reset to a higher cash value if the actual account value grows, capturing market gains.

For example, an annuity purchased with a $100,000 premium and a 6% simple interest roll-up rate for 10 years would grow its income base by $6,000 annually. This would reach $160,000 after 10 years if no withdrawals are made. If the roll-up rate were compounded, growth would be based on the new, higher income base each year, leading to a significantly larger income base.

Withdrawals taken before income payments begin can impact the income base. Most contracts specify that if a withdrawal is made during the roll-up period, the income base is reduced proportionally to the percentage of the cash value withdrawn. This reduction ensures the guaranteed income benefit remains aligned with the remaining investment.

Roll-Up Rate’s Role in Annuity Income

The income base, which grows through the roll-up rate, serves as the foundation for calculating guaranteed lifetime income payments. Once the annuitant begins receiving income, the insurance company applies a predetermined “withdrawal rate” or “payout percentage” to the accumulated income base. This rate, typically ranging from 3% to 6% depending on age and contract terms, determines the annual income payment.

A higher income base, achieved through a consistent roll-up rate, directly translates to larger guaranteed lifetime income payments. For instance, if an income base has grown to $200,000 and the withdrawal rate is 5%, the annual guaranteed income would be $10,000. If the income base had grown to $150,000, the annual income would be $7,500, illustrating this direct correlation. This feature offers a predictable income stream, appealing for retirement planning.

Upon the annuitant’s death, treatment of the income base varies by contract. Some annuities with living benefits may allow a named beneficiary to continue income payments or receive a death benefit based on the remaining cash value. In many cases, if the annuitant dies before annuitization, the death benefit paid to beneficiaries is the greater of the cash value or premiums paid, minus any prior withdrawals, or sometimes the income base if specified.