Navigating the Nebula of Annuity Riders

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Fri Feb 02 2024

Nebula of Annuity Riders

If you are traversing the galaxy on an interstellar trip then you’ll likely come across dozens of different nebulas (which – for any earthlings reading this – are just mysterious clouds of dust and gas that float through space). As an intergalactic traveler, you’ll need to get accustomed to navigating safely through the most mysterious parts of space. 

Similarly, if you’re on a journey through retirement then you’ll need to get accustomed to navigating mysterious financial topics (AKA nebulas) that will undoubtedly spring up along your journey. In this article, I’d like to take a look at one nebula in particular: annuity riders.

What are Annuity Riders?

An annuity rider is an add-on that you can include to an annuity in order to customize it to meet your retirement goals, according to the good folks at Retire Guide. In space talk, an annuity rider is like a special power-up that you can add to your spaceship. This power-up could be anything that adds specialized abilities to your spaceship that could help you on your journey. Think: a lightspeed booster, a special force field for protection, comfy leather seats, a new set of wings that allow for better mobility. You get the idea. 

In non-space talk, annuity riders are add-ons or power-ups that you can include on an annuity contract to receive more specialized benefits. For example, you can include a rider that ensures that your monthly payments increase with the rate of inflation. Or, a rider that stipulates who gets your annuities benefits if you pass away.

By the way, if you need a quick refresher on annuities, they are insurance contracts that offer you consistent income during your retirement. To use Investopedia’s exact words, annuities are: 

“an insurance contract issued and distributed by financial institutions with the intention of paying out invested funds in a fixed income stream in the future.” 

There are tons of different kinds of annuities and much more to learn about them. But, that’s a subject for another article. Anyway, back to annuity riders.  

Common Annuity Riders to Consider

You can design annuity riders to help protect you (and potentially your spouse or family) against any issues that might arise during your retirement. For example, you might want protection against a crashing stock market. Or a bit of security in case you have a sudden medical emergency. If these issues aren’t covered in the contract of your annuity, then you can include an annuity rider.

In this sense, an annuity contract is a bit like a car insurance contract. Practically all car insurance contracts offer a basic level of coverage. But you can also choose to receive more coverage in certain areas or spring for extras like windshield replacement, AAA service, etc.

According to annuity provider Nationwide, there are two main categories for annuity riders: living and death benefits.

Living Benefits

Living benefits are add-ons to your annuity contract that protect you while you’re still receiving the benefit. These can be things like:

  • Guaranteed Minimum Income Benefit (GMIB) rider: A GMIB  guarantees a minimum level of payments once it has annuitized.

  • Guaranteed Minimum Withdrawal Benefit rider: This rider establishes a minimum annual income for the rest of your life, regardless of how the underlying securities that you contract are tied to perform. So, if the world experiences another stock market crash then you won’t need to worry about losing your income.

  • Inflation Protection rider: This rider increases the cost of your annuity payments to keep pace with the rate of inflation, thus protecting your purchasing power over time. This is similar to the Cost of Living Adjustments that are made each year to Social Security payments.

  • Long-Term Care rider: This rider increases your monthly annuity payments to a certain level to meet the cost of long-term care, if necessary

These are just a few of the most common annuity riders that people include in their contracts. But, you can also include annuity riders to help with things like disabilities, terminal illnesses, or other unfortunate life events.

Death Benefits 

Death benefits are annuity add-ons that are designed to protect your family or loved ones if something happens to you. In other words, it’s like installing an automated co-pilot on your spaceship so that the rest of the crew will make it safely to their destination, even if something happens to the captain (that’s you!). A few common death benefit annuities include:

  • Death Benefit rider: This rider lets you leave funds directly to your designated beneficiaries without having to go through probate.

  • Return of Premium rider: This rider guarantees the refund of your remaining principal to your beneficiaries if you die before the full value of your annuity has been paid out.

  • Spousal Protection Riders: This rider protects a surviving spouse with continued financial security.

Now, most people hope that they never have to use a death benefit rider because it usually means that something bad has happened. But, like a life insurance contract, death benefit riders are there to protect your loved ones after you pass away.

Are Annuity Riders Right For You?

So, now that we’ve navigated the nebula of annuity riders, it’s time to answer the big question. Are annuity riders right for you? Does your spaceship need any specific power-ups to keep you (and your loved ones) safe along the journey? As with most financial questions, the answer depends on a lot of different factors.

First, you need to consider the costs of adding different annuity riders. If you could add every single rider for free, then why wouldn’t you? But, there’s a charge to add on different riders. The costs to add riders will vary based on the insurer, the type of rider you’re adding, and the type of contract that the rider is being added to – among other factors. We’d recommend speaking with a financial advisor to help get a better understanding of the costs.

Additionally, it’s worth noting that annuity riders might not be the only solution for the problem that you’re trying to solve. For example, if you want your spaceship to go faster then you might consider adding on a power booster of some sort. While this will solve your goal of going faster, it will also be expensive and inefficient since a power booster burns more fuel. But, another way to increase your ship’s speed is to reduce your luggage so that you’re not carrying around as much weight. Once your ship is lighter, it will go faster while also becoming more fuel-efficient. See. There are two ways to get to the same goal.

In non-space talk, you might be able to achieve the same goal of an annuity rider with another strategy. This is all the more reason why you should speak with a financial advisor, who will be able to provide tailored advice.

We hope that you’ve found this article valuable when it comes to learning how to navigate the nebula of annuity riders. If you’re interested in reading more, please subscribe below to get alerted of new articles as we write them.