When shopping for an annuity, you may come across a variety of variable annuity riders that can be added to your annuity policy. Variable annuity riders can provide additional death benefit guarantees or living benefits such as lifetime withdrawal income benefits rider. But, these variable annuity or equity indexed annuity riders often come at a high additional annual cost.
Variable Annuity Contract Riders: Features, Investments, Insurance, & Cost
A variable annuity can have different types of riders attached to it. A rider is an additional optional feature that can be added to an annuity policy. Riders can provide additional benefits, protections, or options to the annuity holder.
Some of the most common types of annuity riders that are available with a variable annuity include death benefit riders, living benefit riders, and income riders.
A death benefit rider is a rider that provides a death benefit to the beneficiary of the annuity contract in the event of the death of the annuity holder. A death benefit rider can provide a death benefit that is equal to the value of the annuity contract or a death benefit that is greater than the value of the annuity policy.
A living benefit rider is a rider that provides income to the annuity holder in the event that the annuity holder becomes disabled. A living benefit rider can provide a monthly income to the annuity holder or a lump sum payment to the annuity holder.
An income rider is a rider that provides income to the annuity holder in the form of periodic payments. An income rider can provide a fixed amount of income or a variable amount of income.
Here are eleven of the most commonly used annuity riders and what they mean.
Before Annuity Riders: Annuitization or Withdrawal
Before annuity riders, there were only two ways you can get your money out of an annuity plan:
- You annuitize the annuity You can “annuitize” the funds by setting up regular payments. You trade your money in for an income stream. A set number of years or for the rest of your life.
or
- You cash it in The annuity contract owner cancels the annuity contract and takes the cash annuity payout.
Now, you can annuity riders to your annuity. For an additional annual charge, of course. These annuity riders often solve many of the concerns people have, or hesitations, when buying an annuity. Insurance and annuity companies are more than happy to sell these. They are very profitable, and make people happy with the annuity.
Related Reading: Do’s & Don’ts for Baby Boomers Buying Annuities
Annuity sales in 2021 were highest since 2008: LIMRA SRI
Lifetime Benefit Annuity Income Riders
It is very common now for a variable annuity to include a Lifetime income benefit rider (LIB).
The insurance company or annuity provider, ensures that you will receive regular income payments from the annuity, if you purchase the rider. Even if the annuity’s actual balance is depleted and goes to zero – the annuity payments will continue for the rest of your life.
An LIB can help you avoid running out of money, which is a major concern for retirees.
Let’s look at an example. Lets say you put $100,000 into an annuity. The contract guarantees a 5% annual income for 20 years. However the annuity is completely depleted by year 20.
For the rest of your life, the insurance company will pay you the agreed upon type of annuity income benefit, in this example $5,000 (5 % of $100,000).
For someone who starts receiving income benefits at a young age and expects to live another 25 or 30 years, a LIB rider is a great idea.
Withdrawal Benefit Guaranteed Annuity Riders
The two most common Income Riders are:
Guaranteed lifetime withdrawal benefit (GLWB)
GLWB rider is an annuity rider that provides annuitants with a stream of payments for as long as they live. The payments are contractually guaranteed and the annuitant does not have to worry about outliving their savings. This rider is a great option for those who want to ensure that they will have income in retirement, no matter how long they live.
This allows you an income guarantee, without having to give up the money like a traditionally income annuity. Many people are worried about annuitizing, and then they land their heirs lose the money if they die the next day. This rider allows them a lifetime income stream without giving up access to the principal.
A guaranteed withdrawal benefit rider allows you to access your money in a different method. Without needing to annuitize the underlying investment, the GLWB rider allows for instant withdrawals from the invested balance. A proportion formula and calculation of the investment in the annuity determines the amount you can withdraw.
The annuity’s remaining assets are still invested according to the terms of the original annuity contract.
Guaranteed minimum withdrawal benefit rider (GMWB)
GMWB allows annuity owners to take a percentage of their original investments from their annuity until they have withdrawn the entire amount of their original actual investment. The principle put in the annuity by the annuity owner is protected as a result of this. For example, until the whole amount of the initial investment is repaid, the annuity owner can withdraw 10% of the annuity balance each year. Meanwhile, the plan’s remaining balance grows in lockstep with the market performance.
Guaranteed Minimum Income Benefit Annuity Rider
Guaranteed minimum income benefit rider
(GMIB) guarantees a certain income payout regardless of how well your annuity investments have performed since the annuity contract was signed.
Your income payments under a guaranteed minimum income benefit rider are usually dependent on a formula that typically includes:
- A percentage of the annuity value is used to calculate the payout.
- The annuity’s current value at the moment income payments commence, or
- The annuity’s highest contract anniversary value
You would be paid depending on the option that provides you with the highest income under the conditions of the guaranteed minimum income benefit rider.
For example:
You invested $100,000 in a variable annuity and it grows to $200,000 after ten years. You might instead be paid based on a 5% interest rate compounded over ten years. This gives a total value of $162,890.
Your MINIMUM income would be calculated on the $162,900. That is your guarantee The highest of the two values would be used to calculate your income payments.
An major reason why an investor could pick an annuity over a mutual fund is the addition of a guaranteed minimum income benefit rider. It indicates that the annuity buyer has a chance to get more value than a mutual fund can offer, especially in volatile market conditions that are fluctuating and underperforming.
Living Expenses (COLA) Annuity Riders
Annuities provide a certain amount of income. This income is typically fixed for the duration of the annuity contract and is calculated at the time of purchase. While this can offer you with a guaranteed income as the annuity owner, it does not take inflation into consideration.
As a result, a cost of living adjustment (COLA) rider might be added to your annuity. It provides for monthly payment increases based on inflation, typically the CPI or a predetermined percentage rise such as 3% or 4%
Related Reading: Retirees with a Guaranteed Income Are Happier, Live Longer
Annuity Living Benefit Rider with a Guaranteed Minimum Accumulation Rider
Guaranteed minimum accumulation benefit rider
(GMAB) is usually added to a variable annuity and is designed to safeguard the annuity from losses in stock market performance or other investment risk.
Between the time the contract is established and the time it begins producing income payments, the rider promises that the minimum amount received will be the dollar amount invested in the contract, or the gain in the contract’s value.
Only if the annuity’s value falls below the guaranteed value will the benefit be paid. If it never happens, the annuity owner will have paid for a benefit that he or she will never get.
If the annuity’s value exceeds the promised value, certain insurance firms include provisions in the rider that the rider’s cumulative extra costs are repaid to the annuity owner. You’ll want to make sure that stipulation is in place before adding this rider to your annuity.
Death Benefit Riders
The fact that annuities are set up as living benefit contracts is one of their most prominent drawbacks. That is, they provide you an income for the remainder of your life, but there is no form of insurance benefit for your heirs once you die.
This can be a clear disadvantage if you buy an annuity with the expectation of receiving income for the next 20 or 25 years, but you die after only 8 years. The annuity provider will keep the money you invested in the annuity. A clear win for the insurance company, and not you or your heirs.
The death benefit rider converts your annuity into a living benefit and a death benefit contract, allowing you to deliver a death benefit to your heirs in the case of your death. This means, in the above example, your heirs will still receive something.
A death benefit rider ensures that your heirs will get at least the amount of the annuity premium you paid. For example, if you pay $100,000 to establish an annuity and only half of the premium has been returned to you as of the date of your death, your heirs will be entitled to a death benefit of $50,000.
Long-Term Care Riders
Long-term care has been a major concern as people live longer and longer lives. The problem is – long term care is very expensive. Not only that, but the number of insurance companies offering coverage to cover long-term care is dwindling.
However, you can add a long-term care rider to an annuity to ensure that you are covered in the event of a long-term care illness. The annuity will pay the income indicated in the contract, plus a long-term care benefit if it is required. They do this by adjusting the income benefit to you.
For Example:
Let’s say the long-term care costs are $7,000 per month. If your annuity is set to provide you with $2,000 in monthly income , the payout may double to $4,000 per month if you are medically determined to require long-term care.
These increased payments usually will last for up to 60 months. And, if you spend three years in long-term care and then leave, the benefit will not be carried over to a future stay.
Premium Annuity Riders Refund or Return
This rider is similar to the death benefit rider in that it pays your heirs a death benefit in addition to the annuity living benefits.
If the annuity owner dies before the annuity is paid out, the annuity provider will return the actual investment to the named beneficiary, or return of premium rider.
In English? Your heirs are guaranteed to get back at least what you put into the annuity.
For Example
If You invested $100,000 and withdrew $25,000 from the annuity over time. The remaining $75,000 will go to your beneficiaries. Obviously, the death benefit will be lower the longer the annuity contract is in place and the more principal is paid out. It’s also feasible that no death benefit will be paid out after a number of years because the annuity has been depleted.
Rider at Risk
Why would you take out an annuity if you aren’t healthy? After all – you probably have a shorter life expectancy. That’s where the Rider at Risk comes into play. Typically your income payout will be increased due to this, since you have a shorter life expectancy.
This rider will, of course, include a health assessment. The insurance company will almost certainly want to confirm your health issues and condition. It’s kind of like the opposite of Life Insurance. Heart disease, cancer, stroke, leukemia, high blood pressure, and a variety of other medical issues are examples of medical conditions.
Commuted Payout Annuity Rider
You can take a lump payment from your annuity if you have a commuted payout rider. It looks a lot like the guaranteed lifetime withdrawal benefit rider mentioned previously. Many insurance companies have different names for this rider.
The downside to annuities is that they are designed to provide you with a consistent stream of income for the rest of your life. So you won’t be able to do lump sum withdrawal. This rider has the potential to make that happen.
The rider usually comes with an annual withdrawal restriction that is either an actual percentage of the annuity premium paid or a predetermined dollar amount. Also, additional withdrawals are usually restricted to the first few years of the annuity contract’s existence.
Annuity Riders with Disabilities, Unemployment, and Terminal Illness
These are the riders that are related to your health or employment situation. Each situation has its own unique rider.
If you can’t work due to disability – a partial disability benefits rider will pay you benefits. It pays you a certain percentage of the monthly income payment that you and your annuity contract agreed on.
It usually makes these payments for a set amount of time. Usually less than a year. Surrender fees may be waived as well.
A terminal illness rider allows you to access a part of your annuity if you have a health condition that gives you a short life expectancy, such as one year or less. Surrender fees will usually be waived if you surrender within that time frame.
Annuity Riders Conclusion
The 11 most commonly used annuity riders can help you customize your annuity contract to fit your unique needs and goals. Riders can provide important guarantees, income options, and death benefit protection. Be sure to consult with a qualified financial professional to discuss which riders may be right for you.
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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.
