How Do Annuity Riders Work?

Couple going over paperwork with financial advisor
Sam Edwards / Getty Images

Annuity riders have been around for decades, but their popularity grew dramatically after the 2008 stock market volatility.  Investors were then 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 attached to variable annuities.  Today, income riders can be purchased on fixed indexed annuities as well.

Can I Add an Annuity Rider Onto an Existing Annuity Policy?

A rider is an attached benefit that you can add to some deferred annuity policies that solve for a specific need like income, legacy, or confinement care needs.  Riders have to be chosen at the time of application, and cannot be added to the policy after the annuity has been issued.

How Do You Calculate Annuity Riders, and How Do They 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 offer a contractual growth amount of 6% annually for as long as you defer or 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 CD, but you can use that amount for income.

Riders are typically separate calculations within the annuity contract used to determine payment levels.  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.

You Need to Shop Around to See What Income Riders Are Available

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 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 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 cost.  Usually, there are qualification rules within the annuity contract to receive these benefits.  Typically, if you cannot perform 2 of the 6 daily functions (cloth yourself, bath yourself, feed yourself, etc.), then you will qualify to receive the long-term care or confinement care rider benefits.

What Are the Costs of an Annuity Rider

The majority of riders offered come with 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 the rider strategy.

It Is Important to Understand an Income Rider Is a Benefit but Is Not True Yield

Annuity rider growth cannot be looked at as yield.  It is not yield.  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 is “monopoly money” unless it is used for the specified rider benefit.

Remember: Annuity Riders Come in Many Types, and Solve for Specific Needs

Solving for lifetime income, legacy through a guaranteed death benefit (without any underwriting), and long-term care or confinement care are the reasons to add an annuity rider to your policy.