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annuity rider

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 in order to expand or enhance its benefits. There are different categories of annuity riders you might choose to add, depending on your financial needs. Understanding the different types of riders available can help you decide which ones you may need to add if you’re purchasing an annuity.

For help buying an annuity and figuring out which riders you need, consider using a financial advisor.

What Is an Annuity?

An annuity is a type of insurance contract. When you purchase an annuity, you pay a premium for the contract. This may be payable in one lump sum or several installments. The annuity company then agrees to pay money back to you beginning at a specified date.

An immediate annuity begins paying out money to you typically within one year of purchasing it. A deferred annuity, on the other hand, pays out money to you at a future date. So, for example, you might purchase a deferred annuity at age 55 which will then begin making payments once you turn 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 begins making payments to you. This is when the money you paid to buy the annuity has an opportunity to grow. The draw period is when you begin taking payments from the annuity, usually on a monthly basis.

What Is an Annuity Rider?

annuity rider

An annuity rider is an addition to your annuity that offers benefits and protections not included in a standard contract. There are different types of annuity riders you can add, depending on what you want or need the contract to do for you. Keep in mind that the more riders you add, the more you’ll pay for the annuity. Generally, annuity riders fall into one of two categories:

  • Living benefits
  • Death benefits

Living benefit riders provide some type of benefit to you during your lifetime as long as the annuity contract remains in place. A living benefit rider for an annuity will yield some type of financial benefit to you as the annuity purchaser.

Death benefit riders afford financial benefits to someone other than you after you pass away. If you’re married, for example, a death benefit rider could provide income or other benefits to your spouse if they’re listed as your beneficiary. The types of riders you’re able to add can depend on the type of annuity you’re 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 on one or more riders can increase the cost so you want to be sure you’re getting something of value for the money. With that in mind, here are some of the most common annuity riders you might choose to add on.

  • Guaranteed minimum withdrawal benefit rider. This type of rider allows you to withdraw the principal incrementally each year, based on a certain percentage, until you’ve withdrawn the entire amount.
  • Commuted payout rider. Commuted payout riders allow for lump-sum withdrawals in the early years of your annuity contract, up to a certain percentage of the annuity amount.
  • 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 benefit. This type of riders guarantees the minimum amount of value your annuity will accumulate. You might choose this annuity rider option if you want some protection against changing market conditions.
  • Guaranteed lifetime withdrawal benefit rider. A guaranteed lifetime withdrawal benefit rider ensures that you can receive an annual income for the remainder of your life without having to convert any of those payments to an immediate annuity.
  • Enhanced earnings benefit rider. Enhanced earnings benefit riders are useful for helping to minimize the taxes to be paid on your annuity. This type of rider offsets federal income tax on earnings that are payable when you pass away.

With the exception of the enhanced earnings benefit rider, these types of annuity riders are designed to ensure that you’re able to draw a certain amount of income from the contract. There are also different riders you can add to cover specific life or financial situations.

  • Long-term care rider. Long-term care can be very expensive if you don’t have a long-term care insurance policy or you’re not eligible for Medicaid coverage. A long-term care rider increases your monthly annuity payments to help cover these added costs.
  • Disability/unemployment riders. Disability riders and unemployment riders can temporarily increase your annuity payout amount for a set time period if you’re unable to work because of a disability or lose your job.
  • Impaired risk rider. An impaired risk rider is designed for someone who has a known health issue or condition that’s likely to decrease their life span. This type of rider offers higher annuity payments to offset the shorter time frame for which those payments are likely to be received.
  • Terminal illness rider. A terminal illness rider waives any surrender charges you might pay if you have a terminal illness and a drastically shortened 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 preset cap.
  • Return of premium riders. A return of premium rider returns any remaining principal to your beneficiaries if you pass away before the full value of the annuity has been paid out. This type of rider may be good to have if you’re worried about not fully exhausting all of the contract’s benefits during your lifetime.

The Bottom Line

annuity rider

Buying one or more annuity riders could make sense if you want to get more value from your annuity contract. You might opt for a long term care rider, for example, if you don’t have long term care insurance in place. Medicaid can pay for long-term care but only for people who are income- and asset-eligible. If you have too much income or financial resources, you may not qualify. Evaluating your needs and what you’re willing to pay for an annuity can help you decide if 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, that means looking at the annuity company’s ratings. Annuity companies that are financially healthy are more likely to stick around, ensuring that you’re able to collect all of the annuity payments you’re entitled to. An annuity company that has a poor credit rating, however, may be more susceptible to poor financial health or in a worst-case scenario, bankruptcy. That could endanger your ability to draw payments from your annuity contract.
  • Consider talking to your financial advisor about whether an annuity may be right for you and if so, which riders you might want to add. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/FG Trade, ©iStock.com/Koh Sze Kiat, ©iStock.com/AlexanderFord

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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