How Annuity Riders Work and Tips for Choosing One
Annuity riders have been around for years, but they've grown in popularity over the past decade. Due to market volatility, investors were driven to find annuities that had income guarantees attached to their mutual fund investments. Those attached benefits are called income riders and were originally used as attachments to variable annuities. Today, income riders can be purchased on fixed indexed annuities as well.
Can You Add an Annuity Rider to an Existing Annuity Policy?
A rider is a benefit that you can add to some deferred annuity policies that solve for a specific need like income, legacy, or long-term care. Riders have to be chosen at the time of application and cannot be added to the policy after the annuity has been issued.
How Annuity Riders Work
Most income riders and death benefit riders offer a guaranteed annual growth amount that can be used only for that specific need. For example, an income rider might provide a contractual growth amount of 6% annually as long as you defer for a specific period of time. That 6% growth amount can only be used for income, and the high percentage stops accumulating as soon as you turn on the lifetime income stream. You can’t transfer the amount or peel off the 6% interest like you could with a certificate of deposit, but you can use that amount for income.
Riders are typically separate calculations within the annuity contract. For example, if an income rider is attached to a deferred annuity, your policy statement will show the accumulation (investment) value, surrender value, and the rider value. All three calculations are different.
Consider Shopping Around for Multiple Options
It is important to know that all riders are not the same. They are unique to each issuing carrier, and sometimes unique to the specific product being offered. An income rider with one annuity company might be very different from an income rider from a competing annuity company.
It is also important to understand the contractual guarantees and limitations of a rider fully, and you should shop numerous carriers to find the best guarantee. For instance, income rider or death benefit rider growth could be earned using either simple interest or compound interest. That small detail can make a very big difference.
Not All Income Riders Are the Same
There are income riders that solve for lifetime income. Death benefit riders guarantee an annual growth amount that can be used for legacy planning. Long-term care or confinement care riders can be added to help cover the costs of this type of healthcare. Usually, there are qualification rules within the annuity rider contract to receive long-term care benefits. Typically, if you cannot perform two or more activities of daily living (ADLs), then you will qualify to receive the long-term care or confinement care rider benefits. ADLs are activities like eating, bathing, and dressing.
If you don't meet the underwriting requirements for life insurance or long-term care insurance, an annuity with a death benefit or long-term care rider can be a good alternative.
Annual Fees and Riders
The majority of riders offered have an annual fee for the life of the policy. That fee is typically deducted from the accumulation (investment) value on the contract anniversary date. The fee does not come out of the rider value, which is one of the key benefits of purchasing a rider.
An Income Rider Is a Benefit but Not True Yield
Annuity rider growth cannot be looked at as a yield, or earnings. True yield means that the percentage growth can be accessed, like with a CD or bond. Rider yields can be very high and on the surface very appealing, but understand that it can only be used for the need that the rider was purchased for. You can’t access the interest, cash it in, or transfer the rider amount to another annuity. In essence, an annuity rider has no real value unless it is used for the specified rider benefit.
Even though you can't cash in a rider, the right rider can help with common retirement issues. Solving for lifetime income, leaving a legacy through a guaranteed death benefit (without any underwriting), and paying for long-term care or confinement care are all good reasons to consider adding an annuity rider to your policy.
Related: Best Whole Life Insurance Policies
Kiplinger. "What to Know Before Purchasing an Annuity Income Rider." Accessed March 14, 2020.
NAIC. "Buyer’s Guide for Fixed Deferred Annuities," Page 1. Accessed March 14, 2020.
Western and Southern Financial Group. "What Is an Income Rider and Why Would You Include One?" Accessed March 14, 2020.
Nationwide. "Nationwide Annuity Riders and Features." Accessed March 14, 2020.
Kiplinger. "What to Know Before Purchasing a Long-Term Care Rider." Accessed March 14, 2020.
Fidelity. "Long-Term Care: Options and Considerations." Accessed March 14, 2020.