DEFINITION: Rider: An amendment to an insurance policy that has the effect of either expanding or restricting the policy’s benefits or excluding certain conditions from coverage.
When considering investing in an annuity most people are thinking of their retirement and their later years, so it’s only natural that they are considering the end of their lives as well. When you invest in an annuity you can ensure that any remaining premium and earnings (if applicable) will pass on to named beneficiaries (please see the first article in the series, Distribution Options on Inherited Annuities). If you choose to name a beneficiary, you will most likely be adding a “rider” to your annuity contract with the insurance company. Death benefits are among the most common riders, but as you will see there are many optional riders available. Be aware that most riders have associated costs; like life insurance, the more options you have, the more your policy costs! In the case of an annuity, the more riders you add, the less money you will receive on a monthly basis (or your percentage of investment returns will be lower). It’s also important to note that riders are a type of annuity guarantee. Make sure your annuity issuer has the ability to pay, because you are not guaranteed anything on a Federal or State level (unlike some of your premium, which is guaranteed to a certain extent).
Here are some other common riders that may be available to you:
Nursing Home Riders | Long-Term Care Riders:
Fairly simple one here usually offered with fixed deferred annuities. If you end-up needing long-term care –in home or a nursing home- this rider will provide more income to help cover your added costs. This can be as simple as doubling your monthly income-for-life or allowing you to access more of the accumulated value of your annuity (up to 100% in some instances). It can also be a combination of the two.
Cost of Living Riders | Inflation-Adjusted Riders:
- Immediate annuities often offer this one. Basically it does what it says: it raises your monthly income by a set percentage every year to combat inflation. However, the cost of this rider is often expressed in lower monthly payments in the first few years because It takes a while for your yearly increase to catch-up to where you would have started without the rider. Consider putting slightly more funding into your immediate annuity so that you start your pay-out phase with the rider in place at a monthly amount you are comfortable with.
- These riders are sometimes available on immediate annuities and come in two types: Cash Refund, and Installment Refund. If, at the time of your death, your total annuity payments received do not equal the amount of premium you paid into the annuity, your estate/beneficiary will receive the difference. Simply put, the Cash Refund Rider pays out in a lump-sum, and an Installment Refund pays out over time.
Impaired Risk Rider | Medically Underwritten Rider:
- These are riders that get added to an immediate annuity when you have an illness that will reduce your life expectancy. Since you aren’t likely to live as long as another individual without your illness, the insurance company will pay you more per month. Alternatively, it’s also possible to get the same sort of payment as an individual without health concerns but pay a smaller premium.
Commuted Payout Rider:
- This is an option you can add to an immediate annuity that allows you to withdraw a lump sum from the annuity should the need arise. This is almost always a set maximum percentage of the premium paid (such as 10%) but may also be expressed in a fixed dollar amount. This rider is usually time specific. For example, you may only be able to use this feature for the first few years – say up to 5. There are many variations on this type of annuity, so make sure you understand –as with all annuity riders- all of the costs and restrictions involved.
Variable Annuity Riders:
Guaranteed Minimum Accumulation Benefit Rider:
- The GMAB is a type of rider often available with variable annuities during the accumulation phase. If, after a set number of years (defined in your contract – normally 5 or 10 years), the value of your variable annuity is lower than the total amount of premium paid into the annuity, the annuity is adjusted to equal at least the amount of premium paid into the account, less any withdrawals made. For example: you put $100,000 into the annuity originally and you withdraw $20,000 during the first 5 years. Your account should be worth $80,000. If your account doesn’t reflect that amount, it will be restored. Some companies offer the ability to lock-in gains on a yearly basis (usually a fixed percentage of any gains). In this instance, you would get your premiums paid, plus gains minus any withdrawals.
Guaranteed Minimum Withdrawal Benefit Rider:
- Similar to the GMAB, this rider guarantees the contract holder the ability to withdraw a set percentage from their annuity every year until the value of the original premium paid is withdrawn. This is essentially a money-back guarantee should your account not perform well and actually decrease in value.
Guaranteed Minimum Income Benefit Rider:
- The GMIB is a rider that guarantees your premiums will grow by a set percentage every year (usually 5 to 7 %) until you convert over to an immediate annuity, regardless of the performance of your annuity during the accumulation phase. You will receive a monthly pay-out based on whichever value is higher.
Guaranteed Lifetime Withdrawal Benefit Rider:
- This GLWB can be available with some variable and equity-indexed annuities. Essentially it guarantees you an income for life without having to annuitize – you don’t have to convert to an immediate annuity. This can be helpful if your annuity has –and continues to- do well because you can still realize gains on your premium while receiving monthly payments. You can also normally access any remaining premium during your payout phase, minus payments made and previous withdrawals.
Disability, Unemployment & Terminal Illness Riders:
- These riders are generally widely available for both fixed and variable annuities and are fairly simple as they are future “what if” scenarios. If you become disabled, lose your job, or find out that you have a terminal illness, the insurance company allows you to access a portion, or even your entire premium, without surrender penalties. Ask your trusted financial advisor for more information on these riders as each company handles these situations differently.