Although many people who are preparing for retirement – and even a fair number of those who are already retired – are not familiar with annuities, the truth is that these financial vehicles have actually been around for thousands of years.
Dating as far back as the Roman Empire, annuities were offered in the form of a large pool of cash from which income payments were made. Over the past few decades, annuities have grown in popularity as a way to ensure that people don’t outlive income in retirement.
Throughout the years, though, insurance companies have vied to “enhance” their products, in some cases adding a plethora of additional features, as well as optional riders (most of which come at an additional premium cost).
So, here’s something to ponder: If annuities are already designed for paying out a guaranteed income stream, why should you consider an income rider?
If Your Annuity Can Provide Income, Why Would You Need an Income Rider?
In and of themselves, annuities will usually offer several different options for receiving income. These may include income for a set period of time, such as ten or twenty years, or alternatively the option to continue receiving income for the remainder of your lifetime – regardless of how long that may be.
For many people, these income options are just fine. So, why would you consider an income rider then?
First, let’s take a closer look at what annuity income riders are.
Annuity income riders are defined as “an attached benefit to a deferred annuity that solves for longevity risk by providing a lifetime income stream.”
Typically, an income rider will have a guaranteed growth rate which can be used for the receipt of income and can also allow you some added flexibility when it comes to future income planning.
There are several different annuity income riders that you may run across, depending on the type of annuity you’re shopping for. These could include the:
- Guaranteed Minimum Income Benefit (GMIB) – This particular rider can guarantee a minimum payout in the future, regardless of market performance. Therefore, no matter how the underlying investment or funds perform in the annuity’s account, the GMIB rider ensures that you receive a set amount of income going forward.
- Guaranteed Minimum Accumulation Benefit (GMAB) – The GMAB rider guarantees that the value of the annuity’s income will be at least equal to a minimum percentage of the amount of money that you’ve contributed to the annuity over a certain period of time.
- Guaranteed Minimum Withdrawal Benefit (GMWB) – This rider can help to guarantee that a certain percentage of the amount that you’ve put into the annuity can be fully recovered, no matter what the actual performance is.
- Guaranteed Lifetime Withdrawal Benefit (GLWB) – The GLWB rider offers a guarantee that you’ll receive a set percentage of the account value of the annuity for as long as you live.
It is important to point out here, though, that the income rider is not a part of the annuity’s overall contract value. Nor can it be accessed as a lump sum – and this is where people tend to get a bit tripped up.
So, let’s take a look at an example that could help to make this alphabet soup a bit clearer.
First, imagine that an annuity has two separate “sides”. One of these is the contract value, which, for instance, with a fixed index annuity, would be the funds that are contributed and perform, based on the underlying market index.
The other side is the income rider benefit, which – usually for an additional amount of premium – essentially transfers the risk to the insurance company for paying you a lifetime stream of income that will begin at your discretion.
Keep in mind here that this second component of the annuity can only be used for income, though, and in turn, it cannot be “withdrawn” as a lump sum of cash.
Understanding the ABCs of Annuities Before You Make a Long-Term Commitment
While annuity income riders can be somewhat confusing (and expensive), there are times when they can help to customize an annuity to best fit the needs of the purchaser. With that in mind, it is highly recommended that you discuss your goals and objectives with an annuity specialist so that you can better determine whether or not an income rider is right for you.
If you’d like to take a closer look at annuity income riders in order to get a better idea of how these options work, feel free to reach out to us here. We specialize in “taking apart” annuities so that consumers can actually see how they operate, and how they may – or may not – be the best option going forward.