Annuities are insurance products designed to provide you with a guaranteed stream of income. An annuity rider can be added to an existing annuity contract to enhance or enhance its benefits. Depending on your financial needs, you can choose to add different categories of annuity riders. Understanding the different types of riders available can help you decide which riders you may need to add if you are buying an annuity.
Consider using a financial advisor to help you purchase an annuity and figure out what riders you need.
What is an Annuity?
An annuity is a type of insurance contract. When you buy an annuity, you pay a premium for the contract. It can be payable in a lump sum or in several installments. The annuity company then agrees to pay you the money starting at a specified date.
An immediate annuity usually starts paying you money within a year of purchasing it. A deferred annuity, on the other hand, pays you money at a future date. So, for example, you can buy a deferred annuity at age 55 that will start paying after age 65.
Annuities have an accumulation period and a draw period. The accumulation period is the window of time between when you purchased the annuity and when it starts making payments to you. This is when the money you put in to buy the annuity has an opportunity to grow. The draw period is when you start taking payments out of the annuity, usually on a monthly basis.
What is an Annuity Rider?
An annuity rider is an addition to your annuity that offers benefits and protections not covered in a standard contract. You can add different types of annuity riders depending on what you want or what the contract requires of you. Keep in mind that the more riders you add, the more you will pay for the annuity. Generally, annuity riders fall into one of two categories:
- benefits of living
- death benefit
Living benefit riders provide you with certain types of benefits over your lifetime as long as the annuity contract is in place. A living benefit rider for an annuity will provide you some kind of financial benefit as an annuity buyer.
Death benefit riders provide financial benefits to someone other than you after your demise. If you are married, for example, a death benefit rider can provide income or other benefits to your spouse if they are listed as your beneficiary. The type of riders you can add depends on the type of annuity you are buying.
Common types of annuity riders
When considering an annuity, it’s important to think about why you’re buying it and what you want to get out of it. Annuities can be expensive and adding one or more riders can add to the cost so you want to make sure you are getting some value for money. With that in mind, here are some of the most common annuity riders you can choose to add.
- Guaranteed Minimum Withdrawal Benefit Rider. This type of rider allows you to incrementally withdraw the principal at a fixed percentage basis each year, until you withdraw the entire amount.
- Commuted Payout Rider. Commuted payout riders allow lump sum withdrawal up to a certain percentage of the annuity amount in the initial years of your annuity contract.
- Guaranteed minimum income benefit rider. A guaranteed minimum income benefit rider ensures that you receive a minimum amount from the annuity during your lifetime.
- Guaranteed minimum accumulation profit. These types of riders guarantee that your annuity will have a minimum amount of deposit value. If you want some protection against the changing market conditions then you can opt for this annuity rider option.
- Guaranteed Lifetime Withdrawal Benefit Rider. A guaranteed lifetime withdrawal benefit rider ensures that you can receive annuity income for the rest of your life without converting those payments into an immediate annuity.
- Enhanced Income Benefit Rider. Enhanced Income Benefit riders are useful to help reduce the taxes you pay on your annuity. This type of rider offsets federal income tax on the income payable upon your death.
With the exception of the Enhanced Income Benefit rider, these types of annuity riders are designed to ensure that you are able to receive a certain amount of income from the contract. You can also add different riders to cover specific life or financial situations.
- Long term care rider. If you do not have a long-term care insurance policy or are not eligible for Medicaid coverage, long-term care can be very expensive. A long-term care rider increases your monthly annuity payment to help cover these additional costs.
- Disability/Unemployment rider. If you are unable to work or lose your job because of a disability, Disability Riders and Unemployment Riders can temporarily increase your annuity payment amount for a set period of time.
- Impaired risk rider. An impaired risk rider is designed for someone who has a known health problem or condition that is likely to shorten their life span. This type of rider offers higher annuity payouts to offset the shorter time frame for which those payments are likely to be received.
- terminal illness rider. A terminal illness rider waives off any surrender charges that you may pay if you have a terminal illness and have a very short life expectancy.
- Cost of living/inflation rider. Cost of living riders allow your annuity payments to keep pace with inflation. This type of rider allows the value of your annuity to increase along with inflation up to a predetermined limit.
- Return of premium riders. If you die before paying the full value of the annuity, the return of premium rider returns the remaining principal to your beneficiaries. If you’re worried about not fully waiving all of the benefits of the contract over your lifetime, it might be a good idea to take this type of rider.
Bottom-line
It makes sense to buy one or more annuity riders if you want to get more value out of your annuity contract. For example, if you do not have long-term care insurance, you can opt for a long-term care rider. Medicaid can pay for long-term care but only for those who are income- and asset-qualified. If you have too much income or financial resources, you may not qualify. Evaluating your needs and what you are willing to pay for the annuity can help you decide whether you need to add riders and which ones to include.
Retirement Planning Tips
- An annuity can provide you with guaranteed income for retirement, but it’s important to research annuity companies before buying. Specifically, this means looking at the rating of the annuity company. Annuity companies that are financially sound are more likely to stick around, ensuring that you are able to collect all the annuity payments you are entitled to. An annuity company that has a poor credit rating, however, may be susceptible to poor financial health or, in the worst case scenario, bankruptcy. This could jeopardize your ability to receive payments from your annuity contract.
- Consider talking to your financial advisor about whether an annuity might be right for you and if so, what riders you’d like to add. Finding a qualified financial advisor should not be difficult. SmartAsset’s free tool matches you with three financial advisors who serve your area, and you can interview your advisor matches to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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Rebecca Lake Rebecca Lake is a retirement, investment and estate planning expert who has been writing about personal finance for over a decade. His expertise in the finance sector also extends to home buying, credit cards, banking and small business. He has worked directly with several major financial and insurance brands including Citibank, Discover and AIG, and his writing has appeared online in US News & World Report, CreditCards.com, and Investopedia. Rebecca is a graduate of the University of South Carolina and also attended Charleston Southern University as a graduate student. Originally from Central Virginia, she now lives on the North Carolina coast with her two children.
