An annuity is a financial contract between you and an insurance company in which you hand over a lump sum or series of payments in exchange for a steady stream of income in retirement.
But some annuity features, such as a death benefit, may not be included automatically. You may need to purchase these extra benefits, known as riders, separately and get them added to your contract.
What is an annuity rider?
An annuity rider is an optional feature that you can add to your annuity contract. Riders can provide extra benefits or protections, but they’ll also increase the cost of your annuity.
Annuities are highly customizable, thanks in large part to riders. These provisions help tailor your annuity contract to provide the benefits you want, and since riders are optional, you aren’t obligated to sign up for any that don’t fit your needs.
But here’s the catch: Riders come with a price tag. These additional fees can stack up and eat away at your retirement savings. Make sure you understand the costs and benefits before adding a rider to your contract.
Likewise, be sure to understand the limitations or restrictions of any rider. Riders often have specific conditions about when you can access benefits or how payouts are calculated. Pay attention to the small print and fine details. Otherwise, your rider might not be as valuable as you hoped.
5 popular annuity riders
There’s a rider out there for almost every financial need. These add-ons can help you protect your nest egg from inflation, cover long-term care costs or even leave a legacy for your loved ones.
Here are the most common annuity riders and how they normally work.
1. Guaranteed minimum income benefit
A guaranteed minimum income benefit (GMIB) can ensure you always receive a minimum payout, even if your annuity’s investments take a hit. It’s like having a financial floor to protect your retirement income.
The GMIB sets a guaranteed dollar amount or percentage the insurance company must pay you, no matter how your annuity performs. So, if the market tanks, you’re still covered and will receive at least the minimum amount stipulated in your contract. However, GMIBs usually have a holding period, so you’ll need to wait a few years before you can use it.
These riders are most often associated with variable annuities and fixed index annuities, whose value can fluctuate based on the performance of underlying investments or an underlying stock market index. Fixed annuities, on the other hand, provide a set interest rate that may adjust over time, and therefore aren’t exposed to market risk.
2. Guaranteed lifetime withdrawal benefit
A guaranteed lifetime minimum withdrawal benefit rider allows you to withdraw a certain amount of money — usually 3 to 5 percent — from your annuity each year for the rest of your life, even if your annuity loses much of its value. This rider is associated with variable annuities.
One of the biggest advantages of a GLWB rider is the ability to access your money whenever you need it, without paying surrender charges.
3. Death benefit
A death benefit rider can ensure your beneficiaries receive a payout if you pass away prematurely.
With a period-certain death benefit, your beneficiaries receive payments for a specific period, even if you die early. The payout is usually equal to the amount you invested or some other guaranteed minimum.
Some annuities, especially deferred annuities, offer a death benefit even if you haven’t started receiving income. This means your beneficiaries could receive a payout, even if you didn’t live to enjoy the benefits yourself.
4. Long-term care rider
A long-term care rider can help cover the costs of nursing homes or assisted living. If you need long-term care, the rider provides payments to help cover the costs. And if you never need long-term care, the unused funds can be passed on to your beneficiary.
Your contract will specify the monthly amount you can access for long-term care. However, there may be limits on how many years of care are covered.
To activate this rider, you’ll likely need to provide proof or documentation about your health. But the good news is that the monthly payout is often a multiple of your regular income, so you could receive a significant boost if you need long-term care.
5. Cost-of-living adjustment
A COLA rider increases your annuity payments each year to help offset the effects of inflation. These riders can increase your payments annually based on the inflation rate or some other specified amount.
However, a COLA rider often reduces the size of your initial payments. So while this rider increases the size of your payouts over time, your early payments will be smaller than if you hadn’t added a COLA rider to your contract. On the other hand, inflation can erode the purchasing power of your annuity over time, so a COLA rider might be beneficial depending on your financial goals and risk tolerance.
How much do annuity riders cost?
Adding riders to your annuity comes at a cost. Each rider you choose will typically reduce your annuity income by a fraction of a percentage. The more riders you add, the more expensive your annuity becomes, reducing your payouts.
Some riders are surprisingly expensive. They can add 1 percent or more to your annual annuity costs. However, the exact cost depends on the rider’s features and the insurance company offering it.
For example, New York Life offers a death benefit rider, called the Enhanced Beneficiary Benefit Rider, on its fixed deferred annuities. This rider charges a 0.3 percent annual fee, though the fee can rise as high as 1 percent. Meanwhile, the Nationwide High Point Select Enhanced Death Benefit Rider charges 0.5 percent and it’s assessed quarterly.
Before adding riders, make sure you understand the ongoing costs. Don’t hesitate to ask your annuity company for clarification. And consider talking to a financial advisor to get a second opinion.
Bottom line
Annuity riders can be a valuable addition to your contract, but they’re not right for everyone. Carefully weigh the costs and benefits before adding one to your annuity. You may be able to achieve the same benefit the rider offers at a lower cost outside an annuity through other investments or insurance options. And remember, the best rider for you depends on your individual financial goals and risk tolerance.
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