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the 7% is net; this "hypothetical" side is more or less dont want to ever have to trigger this option because keep in mind you are annuitizing to receive an income based on that 7% compound rate. your options would be very limited...but it does give you the peace of mind that you are guaranteed a MINIMUM income regardless of how the markets performed.
yes there is the opportunity to do better...that actually is the goal. the fees are coming from the "real" account balance so in your brothers case the break even point is at about 9% real return (9% - 2% fees). If he does get that 9% he shouldnt even consider triggering the rider - he has just as much in the "real" account and he can do whatever he wants with it (take the whole thing at once if he so chooses) the downside is that you would have paid all the fees for an option that was never used. is the security of knowing your are guaranteed x amount of dollars worth the fees? you decide

Hypothetical @ 7%
225000 initial dep.
240750 end yr 1
257602 end yr 2
275635 end yr 3
294929 end yr 4
315574 end yr 5
337664 end yr 6
361300 end yr 7
386592 end yr 8
413653 end yr 9
442609 end yr 10

its a minimum of 10 yrs but if he so chooses he can let it keep going.
lets say he is now 55 and wants to retire at 65 and he triggers the rider ING (based on current annuitization tables) would give him aprox 25k a year for the rest of his life.

hope this clears things up a bit more.

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