What are Riders?
Riders are optional provisions that can be added to an insurance policy that either enhance or restrict the policy under certain circumstances.
With regards to an annuity contract, the purchaser, or annuitant, has the option to include riders which will provide specified benefits under certain conditions or circumstances. Riders can be a powerful tool to protect against unexpected outcomes that may prevent the investor from enjoying the benefits of their annuity contract due to their personal situation. There are a variety of commonly offered riders, and each has its own associated costs, stipulations, benefits, and limitations. It is important to keep in mind that riders on annuity contracts increase costs to the investor either with an increase in the initial premium investment, or with a decrease in the periodic annuity payments.
What follows is an overview of the most commonly offered riders for annuity contracts. Remember, if you intend to include riders on your annuity contract or are reviewing riders that you already have, you should carefully read your contract and discuss the details of the riders with your financial advisor, as the specifics of how riders will affect your annuity contract vary.
Common Annuity Riders
Death benefit riders are some of the most commonly offered riders because they ensure that your annuity investment can be passed on to your beneficiary. Because they are the most common type of rider, they have the biggest variability between contracts and annuity providers. Typically, a death benefit rider will pass your annuity payments to a beneficiary for a specified period of time, or alternatively, it may pay a single lump sum to your beneficiary.
Inflation adjustment riders offer a type of protection from the inevitability of inflation. This type of rider is typically offered with an Immediate Annuity. Essentially, this rider offers an increase to your annuity payment over time to maintain a steady lifestyle. Inflation causes a decrease in the purchasing power of currency. If you have an annuity that pays you a fixed rate for twenty years, the purchasing power of that payment in the first year of your payments will be significantly less than the purchasing power of that payment twenty years later. Inflation adjustment riders are an option to protect from this inevitable rate of change.
Long-term care riders provide a bit of a safety net in the event that a health issue results in the need for long-term care at home or in an assisted living facility. Under these circumstances, it is possible to access the accumulated value of your annuity without paying surrender charges or distribution fees.
The impaired risk rider is an option to be added to an immediate annuity. This rider is intended to take into account shorter life expectancies, with the result being a larger annuity payment. One of the main factors for establishing the premium cost of a lifetime immediate annuity and the amount of the periodic payments is the purchaser’s life expectancy. Because these annuities make payments for the duration of your life, impaired risk riders increase periodic payments for those with shorter life expectancies.
The commuted payout rider is a provision that can be added to an immediate annuity that allows you to withdraw a lump sum amount should the need arise. This rider often stipulates the total amount that can be taken out of the annuity and the timing. Typically, the amount is a fixed dollar amount or a percent of your premium, and the timing is usually restricted to the first few years.
The cash refund rider is an option offered with some immediate annuities that offers a sort of guarantee on your premium investment. In the event that the owner of the annuity passes away before the total amount of all annuity payments equals the initial premium invested, the remaining balance on the annuity will be paid to the owner’s beneficiaries in a lump sum payment.
Much like the cash refund rider, the installment refund rider offers a similar guarantee on the premium investment. In the event that the owner of the annuity passes away before the total amount of all annuity payments equals the initial premium invested, the remaining balance on the annuity will be paid to the owner’s beneficiaries in installment payments.
The terminal illness rider offers protection on an invested premium in the event that the owner of the annuity is diagnosed with a terminal illness. Under these circumstances, the owner of the annuity is given access to a portion, or sometimes the entire value, of their annuity without having to pay surrender charges.
Unemployment & Disability
Unemployment and disability riders offer a bit of security in the event that an individual’s normal stream of employment income becomes disrupted due to becoming disabled or unemployed. In the event that the annuity owner is disabled or unemployed for an extended period of time, they can withdraw a portion, or sometimes the entire value, of their annuity without paying surrender charges.
Common Variable Annuity Riders
Variable annuities behave differently than other annuities; therefore, the riders that are typically offered with variable annuities also differ. Because variable annuities are tied to the performance of sub-accounts, the invested premium is at risk of losing value. Most of the riders offered on variable annuities act to prevent losses on the invested premiums.
Guaranteed Minimum Accumulation Benefit (GMAB)
The guaranteed minimum accumulation benefit is a rider that protects your premium investment from losses. With variable annuities, there is a risk that your invested premium can lose value due to poor market performance. By including a GMAB rider, the annuity provider guarantees that after a predetermined number of years, usually anywhere from 5 to 10 years, if your variable annuity’s value is less than the initial premium invested, your annuity will be restored to the value of your initial investment.
In some instances, your variable annuity may have locked-in gains which will be incorporated into your annuities minimum accumulation value. In these cases, the guaranteed minimum value to which your annuity will be restored is equal to your initial premium investment plus locked-in gains. Of course, if withdraws have been taken from your annuity, these will be subtracted from your minimum accumulation value.
Guaranteed Minimum Withdrawal Benefit (GMWB)
The guaranteed minimum withdrawal benefit is a rider similar to the GMAB in that it provides annuity owners with protection from poor performance in the market. With the GMWB, the annuity owner is provided with the ability to withdraw a predetermined percentage of their annuity’s value each year until the total sum of the initial premium is returned. Although the amount of the withdrawal is limited to a percentage of the current value of the annuity, the total amount to be withdrawn over time will be no less than the initial premium invested.
Guaranteed Minimum Income Benefit (GMIB)
The guaranteed minimum income benefit is a rider that offers a guaranteed return on your investment. The way the GMIB works is that the annuity owner is guaranteed a minimum annual growth rate. The growth rate varies by contract, but it is typically around 5% to 7% annual growth. After the accumulation phase of a deferred annuity ends, the annuity’s value will equal the greater of either the accumulation value, resulting from the performance of its sub-accounts, or the minimum account value, resulting from the guaranteed minimum annual growth rate.
Guaranteed Lifetime Withdrawal Benefit (GLWB)
The guaranteed lifetime withdrawal benefit is a rider that allows for annuity owners to receive an annual income for life from their annuity without having to convert to an immediate annuity, thus maintaining growth. This rider allows for a well performing variable or indexed annuity to continue earning, while simultaneously providing an annuity payment to the owner.