The Benefits and Drawbacks of Annuity Riders

There are a lot of different choices when it comes to annuity riders.  In a recent Insurance News Net article, “Choosing the Right Annuity Rider for You,” Alex Coppola summarized some of the basic rider options.  Total annuity sales increased nearly 8% from 2012 to 2014.  There are many reasons for this increase, including a volatile market, the higher cost of health care and people living longer lives.  If you are worried about any of these lifestyle factors, annuities can alleviate worry in retirement by providing guaranteed lifetime income.  You certainly pay for the guarantees that you receive from annuity products.  Each rider you elect with your annuity will charge an added fee, so it’s important to add only the riders that offer the benefits you need.  Here is a summary of some of the most used annuity riders, including their benefits and drawbacks.

Variable annuities offer a Guaranteed Minimum Income Benefit (GMIB) that guarantees a minimum level of income after you annuitize your contract.  You will receive this minimum level of income despite any negative market changes.  If the market is up during your accumulation phase, your income payments could increase above the minimum as well.  If you choose to add a GMIB when purchasing your annuity, most insurance companies make you invest your money in more conservative assets.  This could limit the amount of growth you would receive if markets increase significantly.  But that trade-off is worth it to consumers whose top priority is a minimum guaranteed income stream in retirement.

A Guaranteed Minimum Withdrawal Benefit (GMWB) is similar to a GMIB except you don’t have to annuitize your contract before withdrawing money.  This is a benefit for people who are worried about losing the flexibility and access to their savings.  Your rate of withdrawal is usually equal to an amount that will guarantee your initial principal, regardless of what happens to your account balance during your contract.  If your guaranteed withdrawal rate is 7% on an account balance of $100,000, you are guaranteed to receive $7,000 annually until you’ve received your entire $100,000 back.  This is even if the value of your annuity goes below $7,000.

There is a lingering rumor about annuity products that you lose all of your money to the insurance company if you die prematurely.  Death benefit riders assure that doesn’t happen.  There is a fee added when you opt for a death benefit annuity, but some people think that is well worth the knowledge that your remaining premium will go to your heirs if you die before receiving it.  The beneficiary of your choosing will be paid any leftover premium that hasn’t been paid out to you in income yet.  There is the option for your beneficiary to receive the money in a lump sum or to continue receiving income payments like you were.

People are living longer than ever before and that increased aging leads to increasing health care costs.  Once you make it to age 65, you have a 70% chance that you will need long term care at some point in your life.  Long term care insurance is ideal for those looking to help cover the cost of future nursing home or assisted living payments.  Some people don’t qualify for LTC insurance because of their age or health.  That’s when it can be a good idea to look at annuities with long term care riders.  You will be able to use money from your annuity to pay for long term care without being subjected to surrender charges.  These LTC riders also help provide additional income because your yearly payment may increase by two or threefold or you can access more of your accrued account value.  If you add a long term care rider to your annuity and never need it, you will receive your annuity income payments based on the distribution in your contract.

The first thing to do when making a decision about annuity riders is to determine your overall financial goals.  Find a rider that helps you meet those goals, without costing more to you than it is worth.  Riders can either help you achieve a particular goal or lower the risk of not achieving your goals.  You also want to look at the costs and the financial strength of the insurance company issuing the annuity and rider.

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