What are Annuity Riders
Annuity riders are like any other rider that can be attached to an insurance or financial product. Just as a rider that protects valuable diamond jewelry can be attached to a homeowner's insurance policy, a rider can be attached to an annuity to protect its value above and beyond the standard contract.
While riders on insurance policies primarily protect and insure property, annuity riders protect principal and income. On variable annuities, which can be susceptible to extreme market fluctuations and losses, riders are used to protect the principal.
Other types of riders protect the downside risk of variable annuities. Because the gains and losses of variable annuities are subject to stock, bond and credit market fluctuations, annuity owners can purchase riders that limit risk. Most of these riders will protect the downside risk to a certain percentage. For example, if the market to which the annuity is tied to, such as the Standard and Poor's 500, loses 5% for the year, the downside risk rider may limit the loss to 3%. However, this type of rider usually has an upside limit attached to it, too. If the S & P increases by 5% for the year, the amount credited to the account may only be 3%.
Riders on fixed annuities protect income by guaranteeing that the annuity owner will receive distributions in a specified dollar amount for a specified amount of time.
What are the Most Common Annuity Riders?
Income riders are the most common type of annuity rider. Annuity income riders include guaranteed withdrawal benefits and guaranteed lifetime income benefits. While some "straight" annuities are sold with these riders, other annuities are marketed with these riders already attached.
The guaranteed income rider is attached to provide the annuitant with a secure retirement. The typical contract states that in exchange for a single premium, otherwise known as a lump-sum premium, the life insurance company will guarantee that payments will be made to the annuitant each month, quarter or year. The guaranteed income rider is very popular among those who have recently retired.
As they begin to take their normal qualified distributions, some find it more beneficial to take a larger distribution, pay the taxes and purchase an immediate annuity. Others tend to roll qualified money over into a guaranteed annuity between the ages of 59 ½ and 70 ½ and then take the guaranteed distributions.
Another common annuity rider is a death benefit. For years, one of the major drawbacks of annuity purchase was the risk of death in the early years of the contract. For example, if a retiree were to purchase an annuity and die before he or she could receive the entire amount of the principal back, or any of the principal for that matter, the insurance company kept the balance of the account. Now, however, a death benefit rider that ensures that a beneficiary receives at least the balance of the premium can be purchased with most annuities.
For example, if an annuity were purchased for $100,000 and the owner dies after only $50,000 has been distributed to him or her, the beneficiary would receive $50,000. Another type of death benefit rider pays the beneficiary the balance in the account for the number of years that remain on the contract. If the annuity owner purchased an annuity that would pay him or her a set amount over 20 years, but he or she dies in year 12, his or her beneficiary will be paid for eight years.
A return of premium rider guarantees that the annuity owner will receive back at least the initial amount he or she put in as the premium. The withdrawals can be structured in any number of ways, but the most important feature is that under no circumstances will he or she be paid less than the amount invested.
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Why Choose Annuity Riders?
As the investment landscape has become increasingly competitive and difficult to navigate, insurance and annuity companies have developed products that are more suited to their customers' needs. And, as more financial information and competitive information is available over the Internet, insurance and annuity companies need to develop product and annuity riders that make their customers feel comfortable.
The Downside of Annuity Riders
Life insurance companies incur risk when they sell annuities. When an investor buys a guaranteed lifetime income annuity, he or she transfers the risk of outliving his or her assets to the insurance company. In other words, if at age 65 an investor in very good health has only $20,000 in retirement savings, he or she could be at risk running out of money very soon. If, however, he or she purchases an annuity with a lifetime income guarantee, he or she will ensure that money will be coming in each month for the rest of his or her life. The insurance company, then, takes the risk of the investor outliving his or her $20,000.
While the insurance company may not pay the investor the same amount he or she could get with another annuity option, the risk has been transferred. Whether the investor lives another two or thirty years, the insurance company will guarantee the income. Married couples who want to ensure that the surviving spouse has income for the rest of his or her life can purchase an annuity jointly, which is simply a different type of rider. But, again, the amount that is paid out each month, quarter or year will be less than if the rider is not attached. Married couples with additional assets are often encouraged to purchase annuities without this type of rider.
The important thing to remember about annuity riders is that they attempt to control risk and reward for both the insurance company and the owner of the annuity. While in most cases, a mutual benefit can be achieved investors are always advised to consider annuity riders very carefully. First, determine the potential risk and reward of the contract without the riders. Then, see how the contract compares with the riders.
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