Variable Annuity: Riders Worth Considering
Variable annuities have really come full circle, and the evolution has proven to be a valuable investment tool for many retirees. There is tremendous variety available with a number of strong and reputable companies; all offering a full array of RIDERS (added benefits to your annuity account). This article aims to explain some of the riders that we feel should be considered.
We’ll outline the basics of each added feature as well as list some pros and cons of these riders. It should be noted that riders have a cost and the expense will add to the costs of the account. Please keep in mind that a private consultation with financial planning professionals will be necessary to determine whether an annuity or any riders will make sense for you, your family, and your specific investment needs.
Here are some of the riders available in the variable annuity marketplace are worth having a look at:
Guaranteed Minimum Income Benefit
This type of rider will provide a guaranteed amount, typically a percentage of the account value at annuitization, as regular income guaranteed whether the account goes up or down. This type of fixed payment guarantee or insurance is the reason retirees consider an annuity in the first place, but hasn’t been available on variable annuities until recent years. The only stipulations on such a benefit may be restricted portfolio risk levels and withdrawals that cannot exceed the set percentage.
The Guaranteed Minimum Income Benefit can be a really valuable rider: consider the persons that invested in a variable annuity before 2008! Without this rider they’ll be taking out a percentage of a severely diminished account. Here’s a specific example of a common 7% guaranteed minimum income rider on $100,000 account value; The first person buys the rider, get’s 7% each year or $7000, so when the account drops to $60,000 he/she will still get the $7000 per year for life as long as they don’t withdraw more.
The second person makes the same investment without the rider and starts with $7000 withdrawals, but after the market drops now has to settle for $4200 annual payments (that’s 7% of $60,000). In most cases, the benefit does allow for increased payments when the account value goes up. The protection is insurance against the market going down.
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Spousal Protection Rider
This type of benefit allows the spouse to be a joint annuitant on the account. What this means is that upon the passing of a spouse, the surviving person can either receive the death benefit and cash out the annuity or choose to keep the annuity and collect payments for their remaining years. The option not to cash it out is significant; as the surviving spouse will not have a giant lump sum of tax deferred interest to pay upon a death. Again, the peace of mind is important and the surviving members of the family are protected and given options.
Though the payments for joint life options may be less than those of single life payouts when it comes to pensions and annuities, many couples desire the protection and want the dependable income to plan their future. This rider gives families the option to achieve this with their annuity account.
Lifetime Guaranteed Income Benefit
This valuable feature of variable annuities on the market today provides protection against both inflation and outliving your money. In many cases this rider can include both guaranteed growth and guaranteed income for life! Before you begin withdrawals you can participate in the highest of market performance OR a simple interest payment (typically around 5%). There may be variations of the amounts based on how long you plan to wait before withdrawals begin, but this is a pretty good benefit despite the added costs. Isn’t this the ultimate investment? Upside potential with downside protection!
Couple the Lifetime Guaranteed Income Benefit with a lifetime guaranteed payment and you’ve got a great tool for financial planners to help a family map out their future income and secure their retirement. Here’s an example of how it could work for a family:
Say a family has $100,000 in a maturing CD, a total portfolio value of $500,000, and ten years until retirement where they’ll need $1000 of income per month from their investments. In this case a variable annuity with a Lifetime Guaranteed Income Benefit and a 5% simple interest growth until withdrawals begin would be suitable. The $100,000 is only about 20% of their portfolio and could be used to fund the annuity.
In the ten years until they retire the account is guaranteed (by the insurance company) to grow to $200,000, at which time the Lifetime Income Benefit could be used to supply a 6% (or $12,000 per year, $1000 per month) income stream to supplement the fixed incomes they will rely on. In fact, they could get more income if the market performs better than the simple interest guarantee. Either way, they have the peace of mind that both spouses will be taken care of with regard to income needs.
The Variable Annuity Verdict
Most of the benefits of annuities will come from the core functions of tax deferral and insuring income, however the three riders listed above can add substantial protection and benefits to families. It is very important that anyone considering an annuity as an investment have a detailed conversation with a qualified financial professional. Though we have provided some simple descriptions and examples, many of the riders may not be available to you depending on where you live and other circumstances. Further, in some cases the decision to add a rider to your account can be made later or it can be added when needed. Since each rider has an added expense, you may be able to save yourself some money by choosing an account and riders only when needed.
Many investors turn and run when ‘additional expenses’ are mentioned. With regard to annuities and riders, it is important to understand what you are getting for the added costs. Have a clear and detailed discussion with your advisor to determine if there is value in adding these features to an annuity account. If you already have an annuity and aren’t sure if you have these great features, set up an appointment to see if they can be added or if you have an opportunity to move your assets to an account that can offer more. What is upside potential with downside risk worth? What is the dollar value of protecting your spouse and family should something happen? Food for thought.
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