While just about all of my clients have heard the term “rider,” very few understand what they are when it comes to their insurance and annuity policies. Riders are simply voluntary optional benefits you can add onto an annuity or life insurance. Some can be very helpful for you or your beneficiaries while others might cost you more than they’re worth. When you’re considering an annuity, income riders can significantly impact that eventual monthly payout, which is why it’s important to know what would be beneficial to you and what to avoid. All annuity riders are usually voluntary options and, often times, can cost as much as 1% of the value of a policy. Balancing the cost to you with the benefit to you or your beneficiaries can be a simple way to help determine if purchasing a rider makes sense for you.
Riders for Inflation
One common type of rider that you’ll hear of in an annuity is the inflation rider. The inflation rider is just like it sounds. It’s a voluntary option designed to address inflation. It’s often called a COLA rider as well, short for cost-of-living adjustment.
An inflation rider can be adjusted on a simple or compound basis. That means annually, your insurance company will recalculate the monthly amount for your income payments for the year by a certain percentage based on inflation. When they use a simple calculation, it’s based on the initial amount of premium paid, while in the case of a compound calculation, it’s based on the contract value at the time of adjustment. For an inflation rider, often times, a compounded one can be more beneficial than a simple one. Also, these may be a bigger benefit when you are taking lifetime income, as the longer the annuity pays out, the more vulnerable it is to inflation.
Riders for Commuted Payout
The next rider you may want to consider is the commuted payout. A commuted payout rider can be added to an immediate annuity and allows you to withdraw a lump sum from the annuity if needed. Immediate annuities are hard to surrender because you’re paying for an immediate stream of income. With a commuted payout rider, you’ll be permitted to take a percentage of your premium, or a fixed dollar amount, above and beyond your payments on an annual basis, although limitations are often included making it so you can only use this feature for the first few years. This rider can give some liquidity to immediate annuities, which don’t generally offer that.
Riders for Beneficiaries
While some riders are designed to give you more protection from common risks like inflation, others are there to help protect your beneficiaries.
If you don’t have other provisions in place for your beneficiaries, like life insurance, then you might want to consider certain death benefit riders. Typically, these death benefit riders are available on immediate and deferred fixed annuities.
In a refund rider, if the total amounts of income payments paid before the annuitant’s death are not equal to the total amount of premium, the difference will be returned to the chosen beneficiary.
In a death benefit rider, the amount paid can vary greatly, but it will be based on the account value, rather than the premium paid. In short, a refund rider will pay back your premium, while a death benefit will pay back your premium plus a certain amount of interest earned. Both of these may be good for annuitants with family members who want to reduce risk because money not protected with such a provision can be surrendered to the annuity.
Riders for Health-Related Expenses
Finally, there are certain annuity riders that are really entirely dependent on the health and life of the annuitant. Those need to be considered on a case-by-case basis.
Some riders are purchased with the intention of preparing for future health-related circumstances that may or may not ever materialize. While this may not be a worthy purchase for everyone, if you have certain medical conditions or a family history of health problems, these can help.
One of the most common add-ons is a long-term care rider. A long-term care rider will allow you an increased income payment in the event that you need nursing care. This might mean increasing payments for life, or it could mean allowing you access to a portion of your premium without having to pay surrender fees. This can be a valuable choice if you don’t have long-term care insurance. However, as with the other riders, there’s also the risk that you could pay for it and never use it.
Another common one is the impaired risk rider. An impaired risk rider can be applied in the event that you have a medical condition that might shorten your lifespan. Because there’s a chance that you won’t live as long as a healthy annuitant your age, the insurance company may offer you higher income payments, in exchange for an increased premium.
The Effect of a Rider on Your Annuity
In all the cases of riders, for every one you add on, the annuity contract’s value will be reduced by the cost of the rider. This may even result in a loss of principal and interest in any year in which the contract does not earn interest or earns interest in an amount less than the rider charge. Too many riders could really reduce your expected payment, and might even duplicate policies you already have available. Before adding riders, it’s often recommended to see what similar coverage on a separate policy would cost you. For example, would a life insurance policy be a better choice than the annuity death benefit? Or should you consider purchasing supplemental long-term care insurance instead of a long-term care rider on your annuity?
These are questions that a financial professional can help you with. If you’re considering an annuity with any riders, contact one of the insurance professionals in Retirement HQ’s network to help ensure you’re paying for a helpful benefit and not making a costly mistake.
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