An Introduction to Annuity Riders: What They Are and How They Work
Witten By Nikhil Bhauwala
2 min read
Posted - Fri Dec 15 2023
An annuity is a unique investment option that provides a guaranteed income stream for a specific period of time. An annuity can help you maintain a stable income throughout your retirement years, and it can also provide a financial safety net for your loved ones. Often, these annuities are accompanied by optional riders that can be paid or free.
So, what exactly is an annuity rider, and how does it work? In this article, we will explore the basics of annuity riders, including their types, benefits, and potential drawbacks.
An annuity rider is a feature that can be added to an annuity contract to provide additional benefits or options to the annuity holder. Riders can vary depending on the specific annuity product and the insurance company offering it. The most common benefits of annuity riders include a guaranteed income stream for a specific period of time or a death benefit for your loved ones.
Types of Riders
There can be a number of annuity riders, depending on the insurance company that issues the annuity. However, almost all annuity riders can be classified into either income riders or death riders:
Income riders are riders that help either boost or enhance your income or income-earning capacity. These riders are useful for generating additional income while you are alive.
One of the main types of income riders is the guaranteed lifetime income rider. A guaranteed income lifetime rider provides a guaranteed income stream for a period you can’t outlive. This guaranteed income stream is not affected by market fluctuations or other economic factors. These riders can be particularly beneficial for retirees who are looking for a stable source of income throughout their retirement years.
There are several different types of income annuity riders available, each with its own unique set of features and benefits. Some popular types of income annuity riders include:
- Guaranteed Minimum Income Benefit (GMIB) Rider: GMIB stands for Guaranteed Minimum Income Benefit, which is a type of insurance benefit that guarantees a minimum income stream to the policyholder at a specified point in the future. This benefit is typically offered as part of an annuity or other retirement income product.
An example of GMIB is a policyholder who purchases a variable annuity with a GMIB rider that guarantees a minimum income stream of $50,000 per year starting at age 65. If the policyholder’s account value is less than the guaranteed amount at age 65, the insurance company will make up the difference and provide the guaranteed income stream.
In this example, the GMIB provides the policyholder with the peace of mind of a guaranteed income stream in retirement, regardless of market fluctuations or investment performance. However, it is important to note that GMIBs typically come with additional costs and fees and may not be suitable for all investors depending on their individual financial situation and retirement goals.
- Guaranteed Minimum Withdrawal Benefit (GMWB) Rider: This rider guarantees that the annuity owner will be able to withdraw a certain percentage of their initial investment each year, regardless of market fluctuations. For example, if you invest $100,000 in an annuity with a GMWB rider that guarantees a 5% withdrawal rate, you can withdraw $5,000 per year, even if the annuity’s value drops due to market fluctuations.
Death Riders are riders that help you leave a legacy after you are gone. It may be in the form of a lump sum payment to your beneficiaries or in a series of payments. An example of a death rider is an enhanced death benefit rider, which helps your beneficiaries to receive enhanced payments in case of your death.
There are several different types of death annuity riders available, each with its own unique set of features and benefits. A Guaranteed Death Benefit rider is the most popular type of death benefit rider.:
- Guaranteed Death Benefit Rider: This rider provides a death benefit to the annuity owner’s beneficiaries if the annuity owner passes away before the end of the contract. Let’s say you invest $100,000 in an annuity with a guaranteed death benefit rider. If you pass away before the end of the contract and the annuity’s value is $120,000, your beneficiaries will receive a guaranteed payout of $120,000, regardless of the annuity’s performance.
Note that these riders are just a few popular ones. There are several more types of riders available in the market, which may be exclusive to different companies. Besides the income and death riders, certain riders help in long-term care. Long-term care riders are new in the annuity world, and currently, not all annuity company offers long-term care riders. We will discuss more on long-term care and other riders in the next few articles.
These Typically Come at a Cost…
It’s important to note that while annuity riders can provide additional benefits and protections, they typically come at a cost that can reduce the overall return on investment for the annuity holder.
For example, a Guaranteed Minimum Withdrawal Benefit (GMWB) rider may cost between 0.5% and 1.5% of the contract value per year. A Death Benefit rider may cost between 0.25% and 0.75% of the contract value per year. A Long-Term Care rider may cost between 0.5% and 1.5% of the contract value per year.
Annuity holders should carefully evaluate the potential benefits and costs of any rider before adding it to their annuity contract. Many companies offer some good complimentary riders; It’s a good idea to compare the costs and benefits of different riders across multiple insurance companies to find the best option for their needs. We often publish in-depth, unbiased reviews of several annuities on our website in detail, where we post in-depth details of the annuity, including the riders they come with and their costs. You can visit our annuity product review page here.
Drawbacks of Annuity Riders
While annuity riders can provide a number of benefits, it is important to be aware of their potential drawbacks as well. For example, annuity riders can be expensive, and they may not always provide the highest rate of return compared to other investment options.
In addition, annuity riders are not suitable for everyone. If you are a young investor with a long investment horizon, you may be better off investing in more growth-oriented investment options. However, if you are a retiree looking for a stable source of income or a way to provide financial security for your loved ones, an annuity rider may be a good option to consider.
In conclusion, an annuity rider can be a valuable addition to your investment portfolio, providing a guaranteed income stream and a safety net for your loved ones. However, it is important to carefully consider the costs and benefits of an annuity rider before making a decision. Talk to a financial advisor to determine whether an annuity rider is right for you.