Annuity Riders Explained

What is an annuity?

An annuity is a financial product designed to accept and grow funds from an individual and then generate a stream of payments at a later point in time. Annuities are primarily used as a means of creating a steady cash flow for individuals during their retirement years.

There are two basic types of annuities: deferred and immediate.  A deferred annuity is typically used to help fund retirement. With a deferred annuity, your money is held and invested for a period of time.  When you are ready for withdrawal, a stream of income is produced. With an immediate annuity, the stream of income begins immediately after your initial investment.  Most people choose the immediate annuity option if they are close to their retirement.

Annuities are special because they are an investment tool that can provide a lifetime stream of income. In some cases, depending on how the product is structured, an annuity can continue providing benefits after the annuitant (the person who purchases the annuity) is deceased.

Both deferred and immediate annuities can be fixed or variable. A fixed annuity is an insurance agreement with a financial services company that results in predetermined dollar payments to the annuitant for the duration of the contract, usually until the annuitant dies. The company guarantees both earnings and principal. A variable annuity is an insurance agreement in which, at the end of the growth stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the invested capital.

What is an Annuity Rider?

Normally, these annuity riders are used to protect the initial investment principal or preserve the income-generating potential of the product in the event of the annuitant’s death. A rider can protect against principal loss due to market fluctuations. There are quite a few different types of riders. This article covers a few of the most common ones: Income Riders, Death Benefits, Long Care Term, and Return of Premium.

Income Riders

Income Riders are the most popular type of riders.  Income Riders are also known as guaranteed lifetime withdrawal benefits (GLWB) or guaranteed lifetime income benefits (GLIB). Income riders provide consumers with a guaranteed benefit payout. By purchasing an income rider on a fixed rather than a variable annuity, the consumer benefits from the income rider while also being protected from investment risk. A guaranteed lifetime income or withdrawal benefit is typically optional on a fixed annuity, and is added to the annuity by a rider. Whereas the annuity has an accumulation value to determine the death benefit or annuitization, the rider also adds a second value: the income value.

Death Benefits

Usually, annuities do not pay out in the event of the investor’s (annuity holder) death. This is often seen as a major disadvantage to the product since a premature death could result in a major loss of principal, which could cause significant financial stress for a surviving spouse, partner, or caregiver. The death benefit rider option, however, allows a contingent beneficiary to receive either the balance of the premium as a lump sum refund or to continue receiving installment payments from the annuity for the remaining number of installments needed to fulfill the contract at the death of the annuitant.

Long Term Care

The long-term care (LTC) rider option allows you to waive or reduce withdrawal charges in the event you are moved to a nursing home or assisted living facility. This wavier allows one to access money quickly in order to pay the often substantial costs associated with long term care.   Having a long-term care rider on an annuity can be an effective substitute for long term care insurance (LTCi) for individuals whose poor health prevents them from qualifying for the product.

Return of Premium

This rider guarantees that you will at least recoup your initial investment on an annuity. Return of premium riders can be expensive, though they are an attractive option for risk-adverse investors who want to ensure that an unforeseen early death does not preclude loved ones from continuing to receive a stream of income

Income Riders guarantee a certain payout, whereas the Return of Premium guarantee the initial and any other income generated.

Annuity Living Benefit

Annuity living benefit riders provide three options: The first ensures the annuity holder will receive all of what was initially invested.  The second guarantees a minimum interest rate or higher.  The final annuity living benefit rider ensures that once payments begin, all payments stay the same.

Important Things to Remember About Annuity Riders

There seem to be an endless number of riders and options that can be added to annuity contracts.

  • Riders allow one to customize an annuity to fit individual needs. Different companies will have different options.
  • Options can differ from state to state. Be aware of what options are available in your particular state.
  • When purchasing an annuity, first determine the potential risk and rewards provided by the contract without riders. Then, see how the contract compares with the riders added.
  • Remember that similar to adding features to a new car, adding riders and options to your fixed annuity contract will also add additional costs.

By Jarret Barnett for  Jarret is a Public Relations Associate at The American College, the nation’s leading financial services educator.


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