Meta Description: Income rider is an additional insurance feature for your annuity contract that guarantees lifelong additional income. Here is all you need to know about income riders you can add to annuities.
Income Riders You Can Add to Annuities
Do you have an annuity and wish to increase the turnover by adding income riders to it? Or maybe you have recently come across the subject of income riders for annuities and wondered how and which ones you can add to yours.
Either way, you are in the right place. Today we will provide you with a comprehensive insight into what income riders are, their advantages, factors you must consider when adding income riders, and what your options for doing so are.
Not long ago, you could only ensure a lifetime income stream by purchasing an annuity. You made a lump sum payment and then received periodic payments as per schedule. However, the drawback was that you would lose access to the principal amount, and this is where income riders came into play.
Which income riders you can now receive lifelong income without annuitizing your principal amount. So let us dive right in and explore the income riders you can add to annuities.
Income Riders for Annuities: An Overview
Income riders essentially refer to an additional insurance feature which you can add to an annuity contract. This allows you the security of having a guaranteed minimum withdrawal amount, independent from your annuity contract’s value.
You will commonly find income riders added onto variable, deferred, and indexed annuity contracts. The best part is that you can withdraw annuity income riders before your contract matures, and or is due for payment.
How Do Income Riders Work?
When you purchase an annuity, there is no guaranteed value on how much it will increase over time due to the market’s volatility. However, if you wish to guarantee a minimum withdrawal amount, the best way is to turn towards income riders you can add to annuities.
You can purchase these income riders when purchasing your annuity or you can simply add them on later. It would be best to ask your annuity provider in advance if they will allow you to add an income rider at some point in the future.
The income rider gives you a benefit base that allows you to receive an added income on top of your annuity. However, you calculate it via one of several guaranteed growth features offered within your contract.
Your annuity insurance company will charge a periodic fee from your contract value in order to pay for your income rider. However, you must remember that the benefit base might only have a guaranteed growth feature till your income starts under the rider. Once you initiate the income, this benefit base might end.
Benefits of Income Riders
In case you are wondering if adding income riders to your annuities is really worth it? Here are the two most promising benefits you can reap for years to come:
Lifetime Income Stream –
in case you are an annuity owner who is unsure about the contract value over the years, an income rider can give you peace of mind. It will help you make the most of your principal amount and guarantee a lifelong income stream till the day you die.
Flexibility –
while an annuity mostly ends with your death, some income riders offer coverage for you and your spouse. This means if one of you passes away, the other can continue to receive the payments as long as they are alive. This is an amazing feature as it will give you peace of mind about your loved ones being taken care of long after you are gone.
5 Things to Consider When Choosing an Annuity Income Rider
There are several aspects that you must consider when choosing the income riders you can add to annuities. Always establish how long you would want to use the income rider for the annuity and if it is transferable upon your death. Other considerations include the following.
- Choose your provider wisely – your income riders and all other annuity guarantees may be promising, but you must check the career ratings of the annuity insurance company you use. It is also critical for you to know that your state guarantee funds protecting your policy do not apply to the income riders.
- Fees – your income rider may charge you a contractual fee to guarantee a roll-up rate for a certain time period.
- The Roll-up Rate – The roll-up rate refers to the guaranteed rate of your ledger growth until you turn on the income stream. This rate can either be a simple interest or a compound interest. Moreover, some annuities may offer upfront bonuses applicable to your income riders as well.
- Know the guarantee period for roll-up rate- income riders may offer a guaranteed roll-up rate for a specific time period. After this time is over, the roll-up rate may be subject to change; therefore, you must know precisely how long this guarantee period is going to last. Some income riders may even restrict you on when to start the income. For example, it can be as long as ten years before you can turn on the income stream to receive scheduled payments. Therefore, always choose an income rider that is suitable for your needs.
- Actuarial Payout – this is the percentage applicable to the income rider’s total value determining your lifelong income stream. For example, if your income rider value grows to $100,000 with the actuarial percentage at 6. When you turn on the income, you will start receiving $6,000 per year for the rest of your life. Your actuarial rate may sometimes be more important than the actual roll-up rate to ensure the highest contractual payout.
Types of Income Riders you can add to Annuities
Most income riders offer you the benefits of guaranteed lifetime withdrawal. They are relatively straightforward and simple, and sticking to the income riders will give you added advantages of access to additional income. The best part is that there is a minimal complication to the entire activity.
Most of the income riders’ living benefits come with the primary purpose of offering you a lifetime income stream with a set withdrawal rate. The best part is that even if your principal falls to zero, you can continue to receive your regular payouts. Think of an income rider as income insurance.
That said, you have to be vigilant if you have a variable annuity contract. This is because not all variable annuities offer income riders that can last your entire lifetime. However, most fixed index annuities offer lifelong income riders for an income stream for life.
Be smart as an investor and look at the annuities offering the best income at the lowest fee or cost. Moreover, that they do not require annuitization while still guaranteeing you an income stream till you live.
There are four leading income riders that you can add to your annuity contract, and here is a detailed break up of them.
Guaranteed Minimum Withdrawal Benefits (GMWB)
This is the most common type of income rider you can add to annuities. However, this is common because it comes with limitations and may offer an advantage to the annuity insurance providers. The Guaranteed Minimum Withdrawal Benefits (GMWB) income rider allows you as a contract owner to withdraw a specific percentage of your investment amount on an annual basis.
However, this does not take market performance into consideration, and you can even continue to receive the benefits until you deplete the whole investment amount. The poor performance of the market may decrease the value of your income rider; however, you will continue to make withdrawals until you have fully recovered the entire original investment.
In case you decide to terminate the annuity contract before your withdrawal period ends, this may result in the payment of your contract’s cash value. That said, the step-up feature offered by the GMWB will ensure higher withdrawal amounts in case your investments perform well in the market.
The amount you can withdraw in a GMWB typically ranges from 5 percent to 7 percent. However, just because you did not withdraw your amount for a year or two will not increase your percentage for the years to come. Yes, deciding to defer the withdrawal will definitely result in accumulating more account value, allowing you to make a must larger withdrawal subsequently.
Pros
- Guaranteed income stream for life
- Potential payments to the added beneficiaries
- Protection against market volatility
Guaranteed Minimum Income Benefits (GMIB)
The GMIB is one of the income riders you can add to annuities, but it requires you to annuitize before you are eligible to start receiving the associated benefits. In case you add a Guaranteed Minimum Income Benefits as an income rider, these may come with age and time constraints.
This income rider will offer you a set lifelong income stream once you retire. However, you will have to give up your principal amount in exchange for a guaranteed and steady income till the day you die. With GMIB, the investment’s performance in the market will not affect the amount you receive for payments.
In fact, the payouts may rely on either of the two factors, which are.
- The amount of investment and its interest rate ranging from 1 percent to 4 percent.
- Your actual annuity contract value
However, whichever is greater will be applicable. The interest rate you receive may be simple interest or compound interest.
Pros
- It will help you offset the risk associated with the investment market.
- Best for retirees wishing to live on the annuity income for the rest of their lives
Guaranteed Lifetime Withdrawal Benefits (GLWB)
The GLWB income rider with your annuity will allow you to withdraw a certain percentage of your principal investment amount on an annual basis for the rest of your life. This percentage may usually range from 3 percent to 5 percent.
Your age may be one of the factors to determine the percentage you receive. Moreover, there can be other factors that the income riders may consider, such as if you wish to receive the payments for a lifetime and if there are any other beneficiaries involved.
Pros
- Flexibility if you wish to access the money in your annuity. This can be helpful in case of a medical emergency or if you find yourself in dire need of funds.
- While you can withdraw the money for your needs, the remaining money continues to grow and earn interest.
Long-Term-Care Protection Income Rider
In case you end up in a care facility or suffer from a catastrophic medical ailment, the long-term care protection income rider will allow you as a contract owner to withdraw your funds without any penalties.
However, there may be specific terms and conditions that you may have to abide by. Discuss these conditions with your annuity insurance provider before signing the dotted line.
Since the introduction of the Pension Protection Act, 2006, several investment products now come with annuities offering long-term care income riders. The best part is that these benefits you receive from these income riders are tax-free, whereas previously, there was a 10 percent penalty on withdrawals.
The Takeaway
The income riders are certainly an added feature to your retirement plan as they fortify your fixed income portion after you retire.
The core purpose of the income riders you can add to annuities is to offer specific benefits to you with an added layer of protection. In most cases, you will be ensuring that you receive consistent and periodic payments for as long as you live.
The most significant benefit associated with adding income riders to your annuity is that it allows you to maintain access and control your principal amount. The best part is that if you choose the right income rider, you will not require annuitization of your principal amount.
With some income riders, your principal amount may shrink or grow as time goes by. This depends on the fluctuation of the investment market and the interest rates applicable to your contract. However, you do not have to worry about the income as it will remain the same.
As these income riders give you a guarantee to receive consistent payouts, you can easily plan your retirement. Now in case you need additional advice to be sure which income riders you can add to the annuities contract, you can speak to an expert. They will help you compare all the available and applicable income riders so that you can settle on the right annuity for your post-retirement days.