Key Takeaways
- Annuity riders are provisions that can be added to your annuity contract, helping to account for your specific needs and to address risks.
- Riders can serve many purposes, from ensuring your payment is adjusted for inflation to adding in long-term care provisions.
- The cost of an annuity rider varies, but can be significant and sometimes results in a reduction of your payout.
What Is an Annuity Rider?
Annuity riders are essentially additional features that can be added into your annuity contract to help customize the product to meet your financial circumstances and specifications.
In addition to a variety of annuity types, you can choose from a long list of riders. Riders come in many different shapes and sizes and can achieve various goals.
One type of rider, for example, could give you the option of leaving all or part of your annuity contract to a selected beneficiary.
Other riders can help protect your annuity payout against inflation by creating set increases in your payments to combat rising costs as you age. Some riders can even provide extra income if you require long-term health care.
Riders are your chance to think about any risks or concerns you may have about the future of your finances and ensure that those concerns are addressed directly in your annuity’s contract.
Riders and contract provisions allow you to customize your annuity to fit your particular needs or address specific concerns.
Brandon Renfro, Ph.D., CFP®, RICP®, EACo-Owner of Belonging Wealth ManagementAs a Certified Financial Planner™ professional and Retired Income Certified Professional®, Brandon Renfro is well-versed in the financial information and strategies needed to meet retirement goals. In addition to co-owning Belonging Wealth Management and assisting clients, Brandon writes regularly for financial publications.
How Much Do Annuity Riders Cost?
Adding a rider to your annuity contract can help you have some peace of mind, but it comes with a cost. As a result, you should exercise caution when incorporating a .
When you add a rider to your contract, the amount of income you receive from your annuity will likely be reduced. The more riders you choose to add, the higher your costs and the lower your payouts will be.
Some riders can be notably expensive, adding as much as 1% or more to the annual cost of the annuity. But the actual percentage will depend on several variables, including the provisions of the rider and the company that provides it. It’s important to have a clear understanding of the ongoing costs of any riders or contract features that you are considering adding to your annuity.
Peace of Mind Comes From Knowing Your Money Is Protected
Guaranteed Minimum Living Benefits
While many different types and styles of riders are available to consumers, they generally fall into two broad categories. The first of these are guaranteed minimum living benefits, which cover income that is received by the original annuity purchaser.
These are typically provided with variable annuity and indexed annuity contracts. Since these types of annuities’ payouts vary based on the performance of a portfolio or index, living benefit riders set a certain minimum amount that the purchaser is guaranteed to receive.
Guaranteed minimum income benefits, for example, set a floor on the dollar amounts of your annuity’s payout during your lifetime. The annuity might pay more, but never less than the amount specified in the contract. Typically, the annuity purchaser faces a holding period of seven to ten years before this provision can be exercised.
Common Types of Living Benefits
- Guaranteed Lifetime Withdrawal Benefit
- Guaranteed Minimum Accumulation Benefit
- Guaranteed Minimum Income Benefit
- Standalone Lifetime Benefit
One common living benefit rider is a guaranteed lifetime withdrawal benefit. This type of rider allows the annuity owner to withdraw a certain percentage of the principal each year until they have withdrawn the full amount. The amount of the investment that is still in the annuity will continue to grow.
Standalone lifetime benefits act similarly but allow for more flexibility regarding the types of assets that are protected.
Guaranteed minimum accumulation benefits, on the other hand, protect against loss of value because of changes in financial markets. This type of rider guarantees that the annuity purchaser will receive payouts worth at least the dollar amount of the purchase or some percentage of the dollar amount after a specified number of years.
Guaranteed Minimum Death Benefits
Aside from living benefits, the other broad area that many riders fall into is death benefits. While living benefits are often added to indexed and variable annuities, death benefits are typically used for deferred annuities.
These benefits come into play if the annuity owner dies during the accumulation phase. If this happens, a guaranteed minimum death benefit rider may allow for a new annuitant to be named.
As with living benefits, there are several different types of guaranteed minimum death benefits.
According to the Insured Retirement Institute, a contract anniversary value or ratchet death benefit increases based on criteria described in the annuity contract.
The enhanced death benefits equal the greatest dollar amount of one of the following:
- Contract value at death
- The premium payments minus prior withdrawals
- The contract value on a specified previous date (could be a prior contract anniversary date)
There is also an initial purchase payment with interest or rising floor option, where the value of the benefit can be either the contract value at death or the premium payments with previous withdrawals subtracted, whichever is greater.
Another option is an enhanced earnings benefit, which offsets federal income taxes on earnings payable at the time of death.
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Other Types of Riders
While most riders fall under the guaranteed minimum living or guaranteed minimum death benefit umbrellas, there are numerous other types that may be offered by annuity providers as well.
Since riders exist to offer additional forms of financial security, most options generally relate to either your finances or your health.
- Disability Income Rider
- Ensures income if you develop a disability that results in a loss of income. The income from your annuity will be higher for a limited time, such as for a year.
- Impaired Risk Rider
- Increases the annuity payments to compensate for a projected shorter payout time (if you have a health condition). Requires proof that the purchaser is sick.
- Long-Term Care Rider
- Covers the cost of long-term care by increasing your payment should you require it. This typically means your monthly payout will be a multiple of your normal benefit.
Health-Related Riders
You may also want to include a crisis waiver in your contract. These waivers allow for early withdrawals with no surrender charges for certain qualifying life events. Like riders, they let buyers customize their contracts and optimize their benefits.
- Cost of Living
- Increases the amount of your payments to adjust for inflation. This adjustment can be based on either the rate of inflation or a specified percentage noted in the annuity contract.
- Return of Premium
- Returns the remaining principal — the original purchase price — to a specified beneficiary if the owner of the annuity dies before the entire principle has been distributed.
Financial-Related Riders
Frequently Asked Questions
An annuity rider is an add-on to an annuity contract that customizes the annuity in a certain way. This can include things like accounting for inflation or setting a floor on payments.
Riders offer a way to provide additional certainty and security to customers. They modify the annuity contract with add-ons that can account for things like soaring inflation or taking care of beneficiaries.
The cost of an annuity rider varies, but it can be significant. The more riders you add, the more the cost will grow.
