How Annuity Riders and Contract Provisions Work: Common Annuity Riders Included In Annuity Contracts

1. Income Annuity Rider

An Income Annuity Rider is a type of living benefit rider that provides guaranteed annuity income payments for the life of the annuity contract owner and joint owner, such as the spouse. This rider ensures you won’t outlive your savings and provides regular cash flow to cover expenses or supplement retirement income.

Here are the top four things to know about Income Annuity Riders:

1. Benefits: Income Annuity Riders provide guaranteed income payments for a specified period, usually for as long as you live, ensuring that you won’t have to worry about market volatility or other factors affecting the value of your annuity contract.
2. Drawbacks: Income Annuity Riders include a fee to provide the lifetime guarantee with costs ranging from 0.1% to 1.25% of the annuity’s value.
3. Pricing: Annuity riders usually come with an annual cost, which varies depending on the type of rider and the annuity issuer.
4. Types of Income Annuity Riders: There are two main types of income annuity riders: the guaranteed income rider and the guaranteed minimum living benefit rider. 

2. Lifetime Withdrawal Benefit Rider

The Lifetime Withdrawal Benefit Rider, also known as Guaranteed Lifetime Income Benefit (LIB), is an annuity rider that allows you to take a lifetime of income from your annuity without losing control of your retirement assets. This rider provides additional benefits to the annuity contract owner while still alive.

Here are some of the benefits of the Lifetime Withdrawal Benefit Rider:

• Provides a guaranteed lifetime income stream
• Offers protection against market volatility
• Allows you to maintain control of your retirement assets
• Provides peace of mind during retirement

3. Cost of living adjustment riders

Cost of living adjustment (COLA) riders are among the ten most common annuity riders. These riders help protect against inflation by increasing income payments over time at a rate equal to or greater than the inflation rate.

COLA riders come at a cost, which reduces the value of the contract each year. The rider charges an annual fee of around 1% of the contract value, regardless of the contract’s performance. 

Despite the cost, COLA riders offer significant benefits. They help maintain the purchasing power of income payments well into retirement by keeping up with the rising living costs. 

4. Guaranteed minimum accumulation rider

The guaranteed minimum accumulation benefit (GMAB) rider is usually added to deferred variable and indexed annuities. It aims to protect the principal from market fluctuations by ensuring a minimum interest rate throughout the accumulation phase.

Here are the key features of the GMAB rider:

1. Minimum Interest Rate Guarantee: The GMAB rider guarantees a minimum interest rate throughout the accumulation phase, which protects the principal from market fluctuations.
2. Works in Conjunction with Annuity’s Performance: The guaranteed growth offered by the GMAB rider is lower than what insurance companies provide in the case of fixed-rate annuities. However, the rider’s floor rate ensures you’ll earn a higher percentage, thanks to market performance.
3. Limitations and Restrictions: The GMAB rider is subject to limitations and restrictions, such as a prescribed number of years (usually 5 to 10) before the annuity’s accumulation value is restored to the number of total premiums paid, excluding withdrawals.

5. Death Benefit Riders

Death benefit riders are an essential feature of annuity contracts that provide financial protection to beneficiaries in the event of the annuitant’s death. These riders can come in different forms, each with unique benefits and costs.

Here are ten of the most common types of death benefit riders:

1. Lump Sum Death Benefit: The beneficiary receives the value of the annuity contract at the time of the annuitant’s death as a lump sum.
2. Five-Year Rule: The beneficiary can spread payments across five years.
3. Inherited Annuity: The beneficiary can choose to annuitize the inheritance and receive payments over a longer period.
4. Exchange of Contract: The beneficiary can exchange the annuity contract for another one in their name.
5. Return of Premium: The beneficiary receives the total premiums paid to the annuity contract upon the annuitant’s death.
6. Stepped-Up Death Benefit: The beneficiary receives a death benefit equal to the highest recorded value of the contract.
7. Ratchet Provision: The death benefit is adjusted upward to reflect any increase in the contract value.
8. Enhanced Death Benefit: The beneficiary receives a more considerable death benefit than what the underlying annuity contract would typically offer.
9. Joint and Survivor: The beneficiary is usually a spouse who receives a death benefit for the remainder of their life after the annuitant’s death.
10. Long-Term Care: The beneficiary can use the death benefit for long-term care expenses.

6. Commuted payout rider

The commuted payout rider permits lump-sum withdrawals within the initial years of the contract, subject to a certain percentage of the annuity sum. 

Here are the steps involved in the commuted payout rider:

1. Choose the percentage of the annuity amount you want to withdraw as a lump sum.
2. Notify the insurance company of your intention to use the commuted payout rider.
3. The insurance company will calculate the amount you can withdraw and send you a check.

The benefits of using the commuted payout rider include having access to a lump sum for unexpected expenses or planned purchases. It can also be helpful for those who want to use their annuity as a source of short-term income. 

7. Riders for increasing payments

Annuity riders are optional features that can be added to your annuity contract to customize it to your specific needs and preferences. One type of rider commonly added is the rider for increasing payments.

This rider provides additional income payments to the annuitant or beneficiary, and several different types of riders fall under this category. Here are the ten most common types of annuity riders for increasing payments:

• Enhanced living benefit rider
• Guaranteed minimum withdrawal benefit rider
• Guaranteed minimum income benefit rider
• Guaranteed minimum accumulation benefit rider
• Death benefit rider
• Inflation protection rider
• Long-term care rider
• Terminal illness rider
• Chronic illness rider
• Disability income rider

Each rider works slightly differently, but they all provide some form of protection or benefit to the annuitant or beneficiary. For example, an enhanced living benefit rider guarantees a minimum income stream for life, regardless of market performance. 

8. Long-term care rider

Long-term care rider has become very popular due to the high cost of care and the high cost of a standalone policy. It is an add-on to an immediate or deferred annuity that provides additional income payments to cover long-term care costs.

This rider increases the contract value and can only be used for long-term care expenses. Purchasing a long-term care rider could be wise if you do not have long-term care insurance.

It covers nursing home expenses, home healthcare, and related costs while helping with estate planning and protecting against inflation. Adding a long-term care rider to an annuity contract ensures financial security during retirement. 

9. Disability income rider

The disability income rider provides additional income payments if the annuity contract owner becomes disabled and unable to work. Younger, more conservative investors who take out an annuity contract in their 40s or 50s would find this rider attractive. 

It typically includes a “look-back” provision that reviews the policyholder’s medical records to ensure no pre-existing conditions would make them ineligible for the rider. With this rider, the policyholder can receive regular income payments to cover expenses and supplement retirement income in case of disability.

Having this rider on an annuity contract can provide peace of mind and financial security for the policyholder in case of unexpected disability, ensuring they won’t outlive their savings.

10. Impaired risk rider

An impaired risk rider protects those who face health issues when they purchase an annuity contract. Due to the increased risk of mortality at a younger age, the annuity endorsement rider guarantees an increased payout allowing for higher income due to meeting the definition of being impaired.

In the event of your disability and inability to work, this policyholder may furnish additional supplementary income payments. 

If you have an existing disability prior to adding or buying an annuity with an impairment risk rider, the insurance company may implement the policy “look-back” provision, which gives the insurance company the right to review your medical history to confirm if you qualify for the additional benefits.

It is vital to discuss medical conditions you face with our annuity professionals before adding this coverage to ensure you aren’t paying for coverage you will not receive.

Impaired risk riders come at a cost that reduces the value of the contract each year. Still, they help reduce the risk of outliving your savings, losing money your beneficiaries could inherit, or losing value to inflation over time.