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Annuity Benefits Explained: Annuity Riders, Learn How To Customize Your Annuity To Your Needs

“My previous post offered a comprehensive understanding of how annuities work. Now, let’s delve into the specifics of various annuity riders. This post aims to equip you with valuable insights that every annuity buyer should know. Let’s get started!”

Annuity benefits, annuity income, long term care insurance

What is a Rider?

The term ‘Rider’ is an insurance term denoting an enhanced benefit. Riders, optional features added to annuities and life insurance policies, typically involve an additional fee. Importantly, they empower contract owners to tailor their contracts to better suit their individual needs.

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Different Types Of Annuity Riders

Living Benefit Riders

Also referred to as “annuity income riders” or “annuity income benefits.” Living Benefit Riders for annuity contracts provide additional income options apart from annuitization.

Living benefit riders offer more flexibility in providing a guaranteed income stream. There are three different types of Living benefit riders for annuities, and two of the three types feature guaranteed lifetime income options without having to annuitize your contract. Its flexibility is why they take the crown as the most popular rider in annuity contracts.

The primary purpose of a Living Benefit Rider is to provide a safety net for income in the event of poor performance, which is why they’re popular in Variable Annuities and often presented as a “downside protection” feature.

Income Riders have a few different versions available, which is why I dedicated a whole post to these riders.

Click here for a deeper dive into Income Benefit Riders.

Death Benefit Riders

More often than not, the “standard” death benefit for annuities simply coincides with the contract value. (Except for the standard death benefit found in Variable Annuities, learn more here.)

Nonetheless, Death Benefit Riders provides the possibility for a death benefit amount to be higher than the contract value at the time of death, often timesfor an additional fee.

Although these riders contain features similar to Life Insurance, it’s important to note that death benefit proceeds from an annuity are taxed very differently from those from a formal Life Insurance policy.

Similar to Annuity Living Benefit Riders, these riders also have a few different versions available.

Click here for a deeper dive into Death Benefit Riders.

Long-Term Care Rider, aka LTC Rider

I’ve reviewed two different forms of Long Term Care Riders in annuity contracts, both of which come with an additional cost:

  1. Stand-alone LTC Rider: These riders function solely based on LTC needs and expenses. Once you exercise the rider, payments will be distributed to the annuitant as agreed upon in the contract terms. If you end up not using the rider, the contract value remains liquid in the accumulation phase.
  2. Living Benefit Rider with LTC features: This was the most common structure in the contracts I analyzed. In fact, out of all of the annuity contracts that contained a long term care benefit, only two were stand-alone long-term care riders. This structure piggybacks off of the available income in the Living Benefit Rider. As a result, if a long-term care need arises, the annuitant will receive accelerated income payments that are usually double or triple the original income payment amount for a specified period of time.

Stipulations: LTC riders usually have requirements before it can be exercised. The most common ones are listed below:

Annuities explained, deferred annuities
  • The inability to perform “two of the six daily living activities.”
  • Some have waiting periods before you can use the rider.

Liquidity Rider

I refer to these riders as a “money-back guarantee” benefit. For an additional fee, contract owners will, at the very least, have access to their original investment amount should they choose to surrender the contract while surrender fees are still applicable. This rider can be handy for Index Annuities, especially Bonus annuities, as these products typically carry hefty surrender penalties and long surrender schedules.

Cash Refund Rider (Immediate Annuities only)

Cash Refund Riders adds flexibility for Immediate Annuity beneficiaries. By adding a Cash Refund Rider, the insurance company distributes all remaining premiums that have not been paid out to your beneficiaries. Without this rider, the insurance company will keep any remaining portion of the amount that was invested into the contract.

How Many Riders Are Too Many?

The answer to that question varies from person to person. I will, however, share a word of advice…

If you decide to purchase more than one rider, ensure they don’t work against each other. Otherwise, you’re paying for a rider that you’ll never use.

Conflicting Annuity Riders

When incorporating multiple riders, ensure they complement rather than conflict with each other. Cohesiveness among riders enhances the overall effectiveness of your annuity.

Example of conflicting riders:

Suppose you were sold a death benefit rider and an income rider. Now, let’s recap on when the insurance feature actually kicks in for each benefit.

Insurance Benefit for Income Riders

My previous post referenced explained when the benefit kicks in for income riders, so I think that’s an excellent place to start, as a recap, here’s a snippet from that post:

“Now, if you’re still alive and your contract value is depleted, then that’s when the insurance benefit kicks in because the insurance company will now have to start paying you out of their pocket.”

In other words, you benefit from an income rider when you run out of money.

But wait… If you run out of money,
that means there is no contract value;
if there is no contract value,
then there is no death benefit…but your income is guaranteed to continue for life.

The scenario above illustrates once you actually start to benefit from the income rider, the death benefit rider is no longer applicable. Annuities must have a cash value for the death benefit to apply.

Insurance Benefit for Death Benefit Riders

Now let’s see at what happens if the Death Benefit Rider kicks in:

What if I pass prematurely? Does that mean my beneficiaries will benefit by receiving the highest value available as a death benefit.

See what I mean here? I am not implying that all riders work against each other; I just want to caution buyers to understand how each rider they’re considering works thoroughly.

As always, feel free to send me a message or comment below if you have questions on a specific rider, and I’ll be happy to walk you through how it works as well.

Disclaimer: The opinions expressed in this blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security, investment, or insurance product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.

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