Annuity Riders, Explained

Annuity riders are add-ons that can be used to enhance and customize the benefits of an annuity contract to better align the contract with your client’s needs. There are a variety of annuity riders available across the insurance industry. However, not all riders are available from every company or for all types of annuity contracts.

How Does an Annuity Rider Work?

In many ways, an annuity rider is analogous to adding an option to a new car. Some options can improve the car’s performance, while others can improve the comfort of your ride. An annuity rider added to an annuity contract adds another feature not available in the standard form of the contract. This can help customize the contract to meet the needs of the contract holder. Generally, annuity riders fall into one of two main categories: living benefit or death benefit riders.

Living Benefit Riders

Living benefit riders provide the annuity contract owner with some type of benefit during their lifetime, as long as the contract remains in force. This category includes several types of annuity income riders:

• Guaranteed minimum income benefit riders set a minimum payout on the annuity payments during the contract holder’s lifetime. For annuity products like a variable annuity or an indexed annuity where the contract amount can vary with the performance of the money invested in the contract, this type of rider sets a floor on the amount of the annuity payments. Typically there is a minimum holding period of 7 to 10 years before the provisions of the rider can be exercised.
• Guaranteed minimum accumulation benefit riders guarantee the minimum accumulation value of the contract. Variable annuities and others may ordinarily see the value of the contract and ultimately the amount of the annuity benefit available affected by fluctuations in the markets. This type of rider provides protection against these market fluctuations.
• Guaranteed lifetime withdrawal benefit riders can be added to many variable annuities to guarantee a minimum annual income from the contract for the rest of the contract owner’s lifetime, regardless of the investment performance of the money inside of the annuity. Payments, expressed as a percentage of the greater of the current contract value or the original amount of premiums paid into the contract, can be for the rest of the contract holder’s life or a specified number of years.
• Guaranteed minimum withdrawal benefit riders guarantee a stream of annual withdrawals from the contract from the return of the premiums that the contract owner paid in, regardless of how the investments inside the contract perform. These riders ensure that the contract holder will be able to at least get their investment in the contract back. In some cases, this type of rider might include a clause allowing the contract holder to withdraw a portion of any upside from the premiums paid into the contract as well.
• Cost of living riders increase the amount of the contract owner’s annuity payments to compensate for the effects of inflation. The amount of the increase is based on the actual rate of inflation or some other trigger specified in the rider.
• Long-term care riders increase monthly annuity payments to a certain level to meet the cost of long-term care if needed. The LTC rider increases the monthly annuity payment to help offset the high cost of long-term care services if needed.
• Disability income riders will provide a payment for a limited period of time, such as a year, if the contract holder becomes disabled and their condition results in a loss of income.
• Impaired risk riders increase annuity payments if the contract owner develops a health condition that shortens their life expectancy. The contract owner must provide proof of their condition to the insurer to trigger these higher payments.
• Terminal illness riders allow the contract owner to waive any applicable surrender charges on the contract should they be diagnosed with a terminal illness resulting in a drastically shortened life expectancy. This allows for the use of the money in the contract to meet any added expenses without incurring normal surrender charges that otherwise would apply.

Death Benefit Riders

Most annuities include some level of death benefit. The standard death benefits will vary by the type of annuity, the insurance company and whether or not the contract has been annuitized. In some cases, adding a death benefit rider can help the contract owner ensure that their desired beneficiaries receive a death benefit from the contract, especially if they die earlier than expected.

• Guaranteed minimum death benefit riders generally cover the situation where the contract holder dies during the annuity’s accumulation period. This type of rider may offer named beneficiaries a minimum guaranteed death benefit or may allow for a new annuitant to be named. Generally, the guaranteed minimum death benefit will equal the contract value at the owner’s death, premium payments made less any withdrawals from the contract or the contract value at a previous specified date such as a prior contract anniversary date.
• Return of premium riders ensures that any remaining premium amounts left in the annuity at the time of the contract owner’s death will be returned to the beneficiaries. This ensures that the full premium value remains in the annuity, so that the full value will be derived by either the owner, the beneficiaries or a combination of the two.
• Spousal protection riders provide a surviving spouse with an added level of financial security from the annuity. Depending upon the terms of the rider, the spouse beneficiary will either provide a lump-sum death benefit or transfer ownership of the annuity to the surviving spouse.

Annuity Rider Costs vs. Benefits

Annuity riders can help tailor the living or death benefits from an annuity to your client’s unique situation. It’s important to note, however, that annuity riders are not free. Costs will vary based on the insurer, the type of rider and the type of contract the rider is being added to among other factors.

If your client is considering adding one or more riders to their contract, they may need your help to analyze the cost of the rider versus the benefits provided. This cost might be paid as an increase in the normal premium payments on the contract, perhaps on the order of 0.5% to 1.0% of the monthly premium amount. Or in some cases the cost may be paid as a reduction in the amount of the monthly annuity benefit once the contract is annuitized. Some riders must be added at the time the annuity is purchased,;others can be added later.

Another consideration is whether the rider is the best way to accomplish what the contract holder is looking to do. For example, is an annuity death benefit a better way to provide a death benefit for your client’s beneficiaries than purchasing a life insurance policy? In some cases it might be, especially if your client might have difficulty getting life insurance coverage. But in other cases a life insurance policy might be the better solution. This is where clients will need your help as part of the retirement and estate planning you do for them.

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