A Small Detail With Big Consequences
A little while back, we were hosting one of our regular Medicare seminars, and a situation came up that really stuck with me. One of our attendees was about to turn 65 and her husband had owned a dental practice for 40 years, employing five people. She was covered under his practice's insurance plan and had been told by her plan provider that she didn’t need to sign up for Medicare.
Luckily, she decided to come to our seminar anyway. We were able to clarify a crucial detail: if your employer-provided health plan covers fewer than 20 employees, you generally do need to sign up for Medicare when you become eligible. If the plan covers 20 or more employees, you might be able to delay enrollment. In her case, with only five employees, she needed to enroll to avoid potential lifetime late enrollment penalties. She left our session incredibly grateful, having potentially saved herself a significant amount of money and future headaches.
This story is a perfect example of how a seemingly small detail in the financial world can have massive implications. It’s why understanding the specific terms and conditions of any financial product is so important. One area where we often see similar confusion is with fixed indexed annuities, specifically surrounding the concepts of an income base (or income value) and the account value. They sound similar, but they serve very different purposes.
The Income Base: Your Personal Pension Blueprint
Think of the income base as a blueprint for a future income stream. It's a figure used by the insurance company to calculate the amount of guaranteed lifetime income you can receive later on. This number is not an amount you can withdraw as a lump sum; it's a "shadow account" or an “Accounting Value” that often grows at a contractually guaranteed rate, sometimes at a higher percentage than the actual account value, especially in the early years of the contract.
What the insurance carriers are attempting to balance here is the trade off between mortality and benefit when looking at a person’s life (morbid I know!). Therefore in order to make their product more competitive, carriers will entice customers with what’s called a “roll up” rate. This term confuses MANY people but ultimately when you hear that term it is something that impacts the Check you receive rather than the value of your overall account with the carrier.
The Account Value: Your Accessible Capital
The account value, on the other hand, is much more straightforward. This is the actual cash value of your annuity contract at any given time. It's the amount of money you would receive if you decided to surrender the policy (though surrender charges could apply, especially in the early years). The account value grows based on the performance of the market index (like the S&P 500) that your annuity is linked to, up to a certain cap or participation rate, and with the protection that you won't lose money due to market downturns.
Very simply, the account value is the money you would receive if you were to walk away from the contract.
Understanding the Core Difference
So, what's the fundamental distinction?
Purpose: The income base is a calculation figure used to determine future guaranteed income. The account value is the tangible, liquid value of your contract.
Access: You cannot withdraw the income base as a lump sum. You can, subject to contract rules and potential surrender charges, access the account value.
Growth: The income base often grows at a contractually guaranteed, predictable rate. The account value grows based on the performance of a chosen market index, which can be more variable.
It's common for the income base to be higher than the account value, especially in the early years of the annuity contract. This is by design. The higher income base allows the insurance company to offer a more attractive guaranteed income stream in the future, which is the primary reason many people consider an annuity in the first place.