Whenever thinking about investing in an annuity to ensure your retirement income, you might have come across annuity riders and their potential advantages. These riders are supplementary options to an annuity agreement that provides the policyholder with additional features and benefits. They can be a good way to customize your annuity to meet your specific needs and preferences.
However, with so many different annuity riders available, choosing the right one for your needs can be a daunting task. Before choosing an annuity rider, the first step you need to do is to determine your specific needs. Generally, any rider can be classified into income rider, death rider, or financial (other) rider. Different people have different needs at different stages, and it might be quite possible that you don’t require any rider at all. This article throws some light on choosing the right annuity rider for your specific needs.
In this article, we’ll explore some of the most popular annuity riders and how to determine which one is right for you.
Income or Death?
In the previous articles, we have discussed that all the popular riders can be classified into either income or death buckets. Income riders are riders that help either boost or enhance your income or income-earning capacity. These riders are useful for generating additional income while you are alive. On the other hand, death riders are riders that help you leave a legacy after you are gone.
The first decision that you need to make before selecting a rider is to determine your priority. If you are more concerned about getting income for yourself in your golden years, you should select a rider that falls under the income bucket. If you are more concerned about leaving a legacy for your loved ones after you are gone, you should select a rider that falls under the death bucket. A particular rider may have mixed features of both income and death buckets, but it will always be more leaning toward any one type. You should select it accordingly.
Most Popular Riders
Riders are not standardized! Although the insurance companies are required to follow some common guidelines with regard to the riders offered, each company customizes rider rates and features that suit their business model. It’s very difficult to compare and comprehend riders of different annuity companies. If you are someone who doesn’t want to get into fine details of different riders, it is wise to go with the most popular riders as they are commonly available across all insurance companies and are easily comparable.
Below are the four most popular and common annuity riders that are available across a majority of annuity products. For each rider, I have given a high-level overview and the scenario in which that rider can be helpful to you. For a detailed discussion on these riders, please refer to separate articles that we have done on these riders.
Income Rider – Guaranteed Minimum Income Benefit (GMIB) Rider
The Guaranteed Minimum Income Benefit (GMIB) rider is one of the most popular annuity riders. It offers the annuity holder a guaranteed minimum income stream, regardless of the performance of the underlying investments. This means that if the policyholder’s account value falls below a certain level, the insurance company will still pay a minimum guaranteed amount.
Use Case – The GMIB rider can be an excellent option for those who are concerned about market volatility and want to ensure a minimum level of income in retirement. However, this rider often comes with fees (on the higher side) that may eat into your investment returns.
Income Rider – Guaranteed Minimum Withdrawal Benefit (GMWB) Rider
The Guaranteed Minimum Withdrawal Benefit (GMWB) rider is another popular option. It offers the policyholder a guaranteed minimum withdrawal amount, regardless of the performance of the underlying investments. This means that the policyholder can withdraw a certain percentage of their account value each year, without worrying about market fluctuations.
Use Case – The GMWB rider can be an excellent option for those who want to ensure a consistent income stream in retirement. However, it’s important to note that this rider may come with lower withdrawal rates than other options.
Death Rider – Death Benefit Rider
The Death Benefit rider is another popular option that offers the policyholder’s beneficiaries a guaranteed death benefit in the event of the policyholder’s death. This rider can help ensure that the policyholder’s loved ones are taken care of after they pass away.
Use Case – The Death Benefit rider can be an excellent option for those who want to provide financial security for their loved ones in the event of their death. Again, it’s important to note that this rider may come with higher fees and may limit investment options.
Financial Rider – Long-Term Care (LTC) Rider
The Long-Term Care (LTC) rider is a relatively new annuity rider that offers the policyholder access to long-term care benefits in the event of a chronic illness or disability. This rider can help pay for expenses such as nursing home care, assisted living, and home health care. The LTC rider can be a good option for those who are concerned about the potential costs of long-term care in retirement.
LTC rider is not standardized across different annuity plans, and each company offers this rider with different rates, features, and terms. It is important that you carefully understand all the features and costs associated with this rider before signing up for the same.
Conclusion
The annuity market offers an extensive range of riders that can make it challenging for individuals to keep track of all the available options. Nevertheless, most individuals tend to select the popular and commonly offered riders that adequately sufice their needs.
It is important to note that selecting the appropriate annuity rider requires careful consideration of your retirement objectives, financial circumstances and risk tolerance. By comprehending the advantages and disadvantages of each rider, you can make a well-informed decision and customise your annuity to suit your unique needs and preferences. Seeking guidance from a trusted financial advisor is advisable if you are contemplating purchasing an annuity or if you are uncertain about the many rider options presented in the market.
Keep in mind that the right annuity rider can help you fulfill your retirement aspirations and ensure financial stability for you and your loved ones. Therefore, taking the time to assess your options and make an informed decision is crucial to achieving your desired outcomes.
