An annuity is a great way to make sure that you have enough resources during your retirement so that you can live a peaceful and comfortable life. However, we cannot forget that every person is different, and they each have their specific needs that can be met, thanks to the annuity payout. That’s precisely what annuity riders are for.
Key Takeaways
- An annuity rider is an additional feature that you can decide to add to your annuity policy.
- Annuity riders allow you to customize your policy so that it suits your needs as much as possible.
- You don’t pay for your annuity riders when paying for the premium – the cost of a rider is taken from the amount you will receive from your annuity policy once your payments start.
- The cost of a rider will depend on what kind of rider it is and your insurance company, as different companies have their own rates.
- Annuity riders can be divided into two main types – death benefits and living benefits.
What Are Annuity Riders?
To put it simply, an annuity rider is an additional feature that can be added to an annuity contract by the annuity purchaser. Thanks to these add-ons, you are able to customize your annuity even more so that it suits your specific needs. Keep in mind, however, that it does not come at no cost – the more annuity riders you decide to add to your annuity contract, the more you’ll have to pay.
How Much Do Annuity Riders Cost
There is no set price for an annuity rider. Depending on which one and how many of them you choose, the costs can significantly vary.
The first thing we should mention is that you don’t pay for a rider by paying a higher premium before the annuity payments start. Instead, they are taken from the income you’re supposed to receive from the annuity. So, to put it simply, the more annuity riders you choose to incorporate into your annuity contract, the lower your payouts will be.
As for the costs, it all depends on factors such as the provisions of the rider or the insurance company you bought the annuity from. Some annuity riders can add as much as one per cent (or more sometimes) to the annual cost of the annuity.
Common Types of Annuity Riders
Generally speaking, annuity riders can be divided into two categories:
- Living benefit riders – Those are riders that provide you with some kind of benefit while you’re still alive, assuming the annuity contract is still ongoing. These are most common among variable annuity and indexed annuity contracts.
- Death benefit riders – These are annuity riders that provide the benefits to your beneficiaries rather than you, as they come into effect once you pass away.
Living Benefits
Some of the common living benefit riders available to you include:
- Cost of living adjustment/inflation rider – With this rider, your annuity payouts will increase by a stated annual percentage to at least partially offset the effect of inflation. Unfortunately, the higher the inflation rate is, the less your payouts become worth due to the fact that their purchasing power declines. With this rider, however, you can keep up with the rising costs of living.
- Guaranteed lifetime withdrawal benefit rider (GLWB) – Thanks to this rider, you can protect yourself against unfavorable market conditions in the case of a variable annuity. With a guaranteed lifetime withdrawal benefit rider, even if your initial investment goes to zero, you will still receive a guaranteed percentage of your original investment as an income payment until you pass away.
- Guaranteed minimum income benefit rider (GMIB) – GMIB ensures that you receive a minimum payout amount for a specific period regardless of the market performance.
- Impaired risk rider – This rider can be added to an immediate annuity. Typically, when you want to sign an annuity contract, the amount of immediate annuity payments is calculated using three main metrics – the amount of premium you pay, how old you are at the commencement of annuity payments, and your life expectancy.
However, if you suffer from a medical condition that impacts your life expectancy, you can opt for an impaired risk rider which will take into account your shortened life expectancy, typically resulting either in higher monthly annuity payments or the same payments that a person in good health would receive but for a lower premium. - Guaranteed minimum accumulation benefit rider (GMAB) – The guaranteed minimum accumulation benefit rider guarantees that after a specific number of years passes, typically 5 or 10 years, your insurer restores your annuity accumulation value to the amount of premiums you paid, provided that at that moment it is lower than that amount. However, you should keep in mind that this does not include your withdrawals.
- Commuted payout rider – Thanks to this rider, you are allowed lump sum withdrawals from your annuity up to a specific dollar amount or a percentage of your annuity. This is in addition to your regular annuity payouts.
- Long-term care rider – Paying for long-term care can drain your savings, especially if you don’t have good health insurance. With a long-term care rider added to your annuity policy, your payments will increase so that you have the funds to cover its cost.
- Disability/unemployment rider – with an unemployment or disability rider, your annuity will be increased for a specific amount of time in case you develop a disability that will cause you to lose income or if you lose your job.
Death Benefits
Since we’ve covered living benefits, let’s take a moment to mention some of the most common death benefit riders.
- Return of premium rider – thanks to this death benefit rider, your beneficiaries will receive any remaining principal in case you pass away before the full contract value of your annuity has been paid out. This rider is especially beneficial to add if you’re afraid that you won’t exhaust all of your annuity contract’s benefits before you die.
- Spousal continuation – this is a death benefit option that allows the surviving spouse to take over the annuity contract while preserving the tax-deferred growth as long as the contract remains valid.
The Bottom Line
An annuity is becoming an increasingly popular investment option often recommended by financial advisors in addition to a life insurance policy – and it’s not hard to see why.
While the standard policy in itself is already pretty beneficial, many don’t know that you can customize it so that it suits your needs even more – all thanks to a number of annuity riders available to add to your contract.
After reading this, you should be familiar with what they are and the most common types – you have to remember, however, that the offer of available riders might differ from one insurance company to another, which is why it’s important that you do your research beforehand. If there’s a rider you’re interested in, make sure that the company you’re considering offers it.
At the Annuity Association, we understand the importance of finding the right annuity policy. We have access to offers from every major insurance company in the United States so that those who trust us, when making this important decision, can have a full overview of their options.
If you’re interested in finding an annuity policy for yourself, don’t hesitate to reach out to us – we will do everything in our power to ensure your needs are met, and you’re provided with the best offer currently on the market.
