The Most Common Annuity Riders, and How They Work

An annuity rider is an optional add-on that modifies or expands what your annuity contract does for you. Riders can protect your income if you outlive your savings, provide benefits for a spouse after you die, help cover long-term care costs or adjust payments for inflation. Each one comes at an added cost, so knowing what each rider offers and whether it fits your situation matters before you sign. Here is a look at the most common types and what they are designed to do.

For help buying an annuity and figuring out which riders you need, consider using a financial advisor.

What Is an Annuity?

An annuity is a type of insurance contract. When you purchase an annuity, you pay a premium for the contract. This may be payable in one lump sum or several installments. The annuity company then agrees to pay the money back to you beginning at a specified date.

An immediate annuity begins paying out money to you typically within one year of purchasing it. A deferred annuity, on the other hand, pays out money to you at a future date. So, for example, you might purchase a deferred annuity at age 55 which will then begin making payments once you turn 65.

Deferred annuities generally have an accumulation phase followed by a payout phase. The accumulation period is the window of time between when you purchased the annuity and when it begins making payments to you. This is when the money you paid to buy the annuity has an opportunity to grow. The draw period is when you begin taking payments from the annuity, usually every month.

What Is an Annuity Rider?

An annuity rider is an optional feature that may be added to an annuity contract, often when the contract is purchased, to expand or modify its benefits. There are different types of annuity riders you can add, depending on what you want or need the contract to do for you. Keep in mind that the more riders you add, the more you’ll pay for the annuity.

Many annuity riders can broadly be categorized as living-benefit or death-benefit riders, though insurers may offer other types of riders and waivers.

Living-benefit riders provide some type of benefit to you during your lifetime as long as the annuity contract remains in place. A living benefit rider for an annuity will yield some type of financial benefit to you as the annuity purchaser.

Death-benefit riders afford financial benefits to someone other than you after you pass away. If you’re married, for example, a death benefit rider could provide income or other benefits to your spouse if they’re listed as your beneficiary. The types of riders you’re able to add can depend on the type of annuity you’re buying.

Common Types of Annuity Riders

When considering an annuity, it’s important to think about why you’re buying it and what you want to get out of it. Annuities can be expensive and adding on one or more riders can increase the cost so you want to be sure you’re getting something of value for the money. With that in mind, here are some of the most common annuity riders you might choose to add on.

Guaranteed minimum withdrawal benefit rider: A guaranteed minimum income benefit (GMIB) rider guarantees a minimum level of income if you annuitize the contract under specified terms, regardless of how the underlying investments have performed.
Commuted payout rider: Commuted payout riders allow for lump-sum withdrawals in the early years of your annuity contract, up to a certain percentage of the annuity amount.
Guaranteed minimum income benefit rider: A guaranteed minimum income benefit rider ensures that you receive a minimum amount from the annuity during your lifetime.
Guaranteed minimum accumulation benefit: A guaranteed minimum accumulation benefit (GMAB) rider guarantees that the annuity’s value will be at least a specified amount at a future date, subject to the rider’s conditions.
Guaranteed lifetime withdrawal benefit rider: A guaranteed lifetime withdrawal benefit (GLWB) rider can provide specified withdrawals for life without requiring you to annuitize the contract, subject to the rider’s terms.
Enhanced earnings benefit rider: An enhanced earnings benefit rider may provide an additional death benefit based on a percentage of the annuity’s gains. The added benefit can help beneficiaries offset taxes they may owe on inherited annuity earnings, but the rider itself does not reduce their tax liability.

There are also different riders you can add to cover specific life or financial situations.

Long-term care rider: Long-term care can be very expensive if you don’t have a long-term care insurance policy or you’re not eligible for Medicaid coverage. A long-term care rider increases your monthly annuity payments to help cover these added costs.
Disability/unemployment riders: Some annuities offer disability or unemployment riders that allow you to access more of your contract value without surrender charges if you meet specified conditions.
Terminal illness rider: A terminal illness rider may waive any surrender charges you might pay if you have a terminal illness and a drastically shortened life expectancy.
Cost of living/inflation rider: An inflation or cost-of-living rider can increase annuity income payments over time to help preserve purchasing power. The amount and method of the increase depend on the contract.
Return of premium riders: Certain return-of-premium or refund features can provide beneficiaries with some or all of the owner’s remaining premium or contract value after death, depending on the terms of the contract.

Bottom Line

Buying one or more annuity riders could make sense if you want to get more value from your annuity contract. You might opt for a long-term care rider, for example, if you don’t have long-term care insurance in place. Medicaid can pay for long-term care but only for people who are income- and asset-eligible. If you have too much income or financial resources, you may not qualify. Evaluating your needs and what you’re willing to pay for an annuity can help you decide if you need to add riders and which ones to include.

Retirement Planning Tips

Consider talking to your financial advisor about whether an annuity may be right for you and if so, which riders you might want to add. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
An annuity can provide you with guaranteed income for retirement, but it’s important to research annuity companies before buying. Specifically, that means looking at the annuity company’s ratings. Financially healthy annuity companies are more likely to stick around, ensuring that you’re able to collect all of the annuity payments you’re entitled to. An annuity company that has a poor credit rating, however, may be more susceptible to poor financial health or in a worst-case scenario, bankruptcy. That could endanger your ability to draw payments from your annuity contract.