The need for financial stability in retirement has many turning to annuities to help offset living expenses and inflation by providing a stream of guaranteed income. While there are many types of annuities out there, many pre-retirees still have varying financial needs that may not all fit under an annuity contract. This is where riders can help, as they allow annuity investors to customize their annuity — within certain limitations — to better fit their retirement needs.
What Is a Fixed Annuity?
A fixed annuity is an investment option for those who want a guaranteed rate or return on their investment after a set period of time. Also known as a multi-year guaranteed annuity (MYGA), this type of investment choice is most similar in nature to a Certificate of Deposit (CD) in that you have a more reliable rate or return and you wait a certain period of time before being able to access your returns.
Where this differs from a CD is that it’s backed by an insurance company, defers taxes on interest gains until withdrawal, and investors can access a portion of the account balance annually. Additionally, annuity holders can pass the asset directly to beneficiaries without having the funds go through a probate process.
What Is a Rider?
An annuity rider is an optional clause you can incorporate into your annuity contract that allows a certain level of customization to your annuity to better fit your needs. There are two main types of annuity riders that can either benefit you while you’re alive or can benefit your beneficiaries upon your passing. Riders can help protect against inflation and provide even more financial stability during your retirement, though it’s important to note that they do come with a cost.
How Do Riders Work?
While riders work differently based on the annuity you choose and the rider you add to your contract, many involve either paying additional funds to receive higher payments, receiving the absolute minimum of the annuity to extend their longevity, or enabling you to receive a set percentage of your annuity principal each year until the entire principal is withdrawn. Regardless of what rider you choose, they work by adjusting the annuity you’ve purchased to work around some of the annuity’s provisions, which allows the annuity to better meet your financial needs.
What Kinds of Riders Should I Consider?
Different insurance companies that sell annuities also have different riders they support. There are many types of riders out there, and an insurance company may offer some of them to annuity investors. Here are some riders to consider:
Guaranteed Minimum Income Benefit Rider (GMIB)
If you don’t need your annuity to cover all your living expenses but want to have an income for the rest of your life, adding this rider to your annuity can help. This rider sets the lowest limit your annuity can pay out, which can provide a stable income amidst a highly volatile market.
Long-Term Care Rider (LTC)
Since many retirees face the eventual need for long-term care, adding this rider to your annuity helps to offset costs associated with long-term care facilities. Typically attached to fixed annuities, this rider helps to increase your monthly annuity payments to ensure you can cover the costs for a long-term care facility that meets your needs and comfort levels.
Inflation Protection Rider
Also known as a cost-of-living-adjustment (COLA) rider, this type of rider adjusts your annuity payments annually to help reduce the impact of inflation on your retirement assets. This helps your annuity payments retain their purchasing power in the future.
Death Benefit Rider
This type of rider enables you to leave funds directly to your designated beneficiaries without those funds having to go through a probate period. Since probate periods can last anywhere from a few months to a couple of years, having this benefit allows your beneficiaries quick access to funds upon your passing. Typically attached to a deferred annuity contract, this rider can offer a certain amount of financial security to your beneficiaries.
Spousal Protection Rider
For those who are married and purchase an annuity together, this type of rider provides a surviving spouse with continued financial security. Spousal protection can work in a couple of ways, with one requiring the payment of a death benefit and the other involving transferring ownership of the annuity to the surviving spouse.
Choosing which rider to incorporate into your annuity contract depends on many factors, including your retirement needs, annuity limitations, market performance, and associated fees. Understanding the different types of riders that are out there can help you find the right one that coincides with your specific situation and financial needs.
